Mortgage interest deduction - Refinance & limit question

[JimS_1]

I have a client with a mortgage originally taken in 2015 for $968k.  There is $820k remaining.  He is currently able to deduct 100% of the interest since it's a pre 12/16/2017 mortgage and under the $1M limit.

He would like to refi and take $100k out to remodel kitchen and other improvements in the home (new loan is $920k).   This is not a cash-out.

Question:  Can he still deduct 100% of interest on loan because he is under $1M and "grandfathered" with the old limit since the original loan was pre- 12/16/2017? The amount of the new loan is below the original mortgage.

My research so far in pub 536 is inconclusive.  

I found two random websites that suggest he could deduct 100%, but I hate to rely on random Google searches..  but I guess I'll rely on a stranger on this board to help me answer it instead!   🙂

But seriously, I would love some viewpoints on how folks have handled this.

Links below on what I found

Thanks!

Reference:

1. See Tim Todd quote in this link: Did you refinance your mortgage last year? Here’s how it could affect your taxes - MarketWatch
2. See Evan Liddiard quote in this link:  Mortgage Interest Deduction: Who Gets It? - WSJ
3. Pub 936 reference I found is below, which suggests the "home acquisition debt" after refi is only the $820k loan balance right before refi. But maybe since the $100k is used to substanitally improve the home, it is Home Acquisition debt, but the Publication does not say which limit would apply ($1M or $750k or remaining balance on original loan...) 

Refinanced home acquisition debt.  Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.

[TaxGuyBill · Accepted solution]

I don't see any basis for that comment in the second link.

The extra $100,000 is Acquisition Debt taken AFTER 2017.  So your taxpayer is limited to $820,000.

[JimS_1]

Thank you TaxGuyBill

I do have a follow-up.  I went through Pub 936 (sorry, typo in my original post) again, and it seems that it may be aggressive to say that the refinance is still subject to pre-2017 limit of $1M.   I spoke with a colleague that takes a hardline view that any refinance now will be considered post-2017 and subject to the $750k limit, not the pre-refinance balance.

If you analogize Pre-2017 with the "grandfathered debt" shown in Pub 936 (which is pre-1987 debt), then I agree you may be able to continue deducting up to the $1M limit, but I'm not sure if the IRS would agree.

Curious yours and others thoughts.

[TaxGuyBill]

When we look at §163(f)(5)(F), it is clear that the grandfathered debt (refinanced amount of the old debt) still gets the $1,000,000 limit.  It is just 'new' money that is subject to the lower limit.

(iii) Treatment of refinancings of indebtedness

(I) In general

In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

And the "clause (i)(III)" basically says the $750,000 limit does not apply to loans on or before December 15, 2017 (the $1,000,000 limit applies).

[JimS_1]

Amazing!  I need to brush up on my code and stop reading publications.   Thank you so much.  HUGE help!

[TaxGuyBill]

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@JimS_1 wrote:

Amazing!  I need to brush up on my code and stop reading publications.   Thank you so much.  HUGE help!

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On the other hand, it can definitely be challenging to decipher the code at times.  Even more so when things are in multiple sections of the Code, Regs, or some type of IRS guidance..  So the Publications can be still quite useful.