How to deduct Refinance home mortgage

[skyworks]

Hi,

1. Current home mortgage (originated 2015) is $760k

2. HELOC is about $250k (the LOC open before 2015 as well and borrowed $50k then, made additional draw of $200k in 2020 to buy rental).

3. Now if the tax payer takes out $1,060,000 ( cash out $50k to but another rental)

$760000+$250000+$50000=$1060000

How would them allocate the interest?

1) $760,000 goes on Ach A

2) $100,000 LOC goes on Sch A?

3). the rest count as rental interest ?

Any suggestions?

Thanks!

[sjrcpa]

1) Yes

2) No. The 100K no questions asked for home equity loans does not exist anymore.

3) 200K for first rental plus $50K for second rental goes on Sch E. The rest sounds like nondeductible personal interest.

[TaxGuyBill]

If that $760k was all used to buy, build or improve the home, that portion of the interest goes on Schedule A.

For the $50k that was borrowed in 2015, it depends on what it was used for.  But be aware that a portion of that may have been paid, so that $50k may very well be less than that now, in which case your numbers don't quite add up.

For the $200k that was used for purchase a rental, that portion of the interest goes with that rental.

For the $50k that was used to purchase another rental, that portion of the interest goes with that additional rental.

[TaxGuyBill]

Foiled again ... Susan beat me to it.  🙂

[sjrcpa]

Barely.

[abctax55]

Delete...

[rbynaker · Accepted solution]

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2) No. The 100K no questions asked for home equity loans does not exist anymore.

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I agree with my colleagues but FYI things may get wonky after TCJA expires in 2025 (or if significant portions of it are repealed before then).  A portion of your Sch E interest will suddenly become Sch A interest if/when the $100K HE interest deduction boomerangs.

This CCM is worth a read, Q&A conclusions start on page 5 (but if you have time, read the whole thing):

https://www.irs.gov/pub/irs-wd/1201017.pdf#page=5

IMO, that's one of the most concise documents you'll find on the subject.  Regs are found in -8T and -10T of 1.163:

https://www.law.cornell.edu/cfr/text/26/1.163-8T

https://www.law.cornell.edu/cfr/text/26/1.163-10T

(Don't let "Temporary" scare you, they've been that way since the 1980s but I'm sure at some point Pinocchio will become a real boy.)

[skyworks]

thanks, links are very helpful!

The LOC opened before 2018, does it automatically qualifies $100k of the interest deduction even the draws taken after 2018?

In this case if the first draw was $100K and used for home improvement, now can they deduct the full $100 k worth of interest from the new loan?

[TaxGuyBill]

No, it is based on when the amount  is actually borrowed.

Where are you getting $100k?  Your original post said he borrowed $50k.  If it was used for home improvement, yes, that portion of the interest goes on Schedule A.

[skyworks]

ok, it is not based on when th line is opened, but the amount borrow.

I just made an exemple if they borrowed another $50k after 2018 to improve th ehome.

[rbynaker]

Ignore the bank terminology.  The bank doesn't care (or usually know) what the money is used for.  The IRS doesn't care if acquisition debt came from a first mortgage, a second mortgage, a HELOC or whatever name the lender comes up with.

Loan proceeds that can be traced to expenditures to buy, build or substantially improve the residence are considered home acquisition indebtedness (assuming they are secured by such residence).