2016 mortgage refinanced - is limit 1 million or 1.1 million

[LSTAX]

Taxpayer refinanced a loan originally secured in 2016.  In 2020, the original loan balance at pay off time was $900,000.  The new mortgage is $1,200,000.  The cash out was used for remodeling. I don't know if they ever had a HELOC on the property.

Is their mortgage interest deduction limited to the prior balance $900,000, or $1,000,000 (the new limit for loans originating post 1987 pre 2017) or $1,100,000

I attempted filling out pub 936 II table 1 worksheet but was stumped on the average loan balance for the loan that was paid off.  At year end the balance was zero so not sure if I use the $900 K or half of that.  Then I got dizzy so I thought I'd reach out... love these last minute people!

Thank you

[rbynaker · Accepted solution]

The refinanced $900K still qualifies but the additional amount borrowed (even though it was used to buy, build or improve the residence) is "new money" and is subject to the new $750K limit.

Rick

[LSTAX]

but one of the examples I found states this which I thought applied since the extra funds were used on a remodel:

A taxpayer can retain the grandfathered $1 million interest limitation,  even if they refinance after 12/15/17. However, the refinanced debt can't exceed the mortgage balance at the time of refinancing, unless the additional amount can be considered acquisition debt  and the total indebtedness falls below $1 million.

[Terry53029]

there is a good worksheet in pub 936 page 12 that will help you to figure it out.

Link: https://www.irs.gov/pub/irs-pdf/p936.pdf

[TaxGuyBill]

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@LSTAX wrote:

but one of the examples I found states this which I thought applied since the extra funds were used on a remodel:

A taxpayer can retain the grandfathered $1 million interest limitation,  even if they refinance after 12/15/17. However, the refinanced debt can't exceed the mortgage balance at the time of refinancing, unless the additional amount can be considered acquisition debt  and the total indebtedness falls below $1 million.

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As far as I can tell, that example you Googled is wrong.

It takes about 50 times to understand what this gibbish is saying, but here is the Code and my interpretation under it"

(II) Limitation on acquisition indebtedness

Subparagraph (B)(ii) shall be applied by substituting “$750,000 ($375,000” for “$1,000,000 ($500,000”.

(III) Treatment of indebtedness incurred on or before December 15, 2017

Subclause (II) shall not apply to any indebtedness incurred on or before December 15, 2017, and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this subsection for the taxable year.

My translation of the highlighted section:  For the limit for debt after 2017, use $750,000 and subtract the qualified grandfathered amount.

[LSTAX]

Thanks everyone - I ended up using the old loan principal amount 900K. 

Grandfathered debt
In the case of acquisition indebtedness incurred on or before December 15, 2017, the $1 million
limitation ($500,000 for married taxpayers filing separately) is grandfathered in. Grandfathered debt
includes refinanced grandfather debt, but only to the extent of the balance of the debt prior to
refinancing. (IRC §163(h)(3)(F)(iii)(I))
Equity indebtedness is not grandfathered

I played with Lacerte  SC 25 excess mtg and the results were always strange, but the worksheet always showed #11 Qualified Loan Limit the beginning balance of the old loan that was refinanced.