Does the IRS look at each mortgage individually in regards to the interest rate deduction?

[mysanity88]

I have a client (joint filing) with two mortgages, current balances are primary- $300k and secondary- $600k, both originated in 2014 ($1 million grandfather clause applies). He would like to refinance both mortgages in 2018. Does the IRS look at each mortgage individually in regards to the interest rate deduction on Schedule A? 

For example:

If he refinanced his primary to $350k through a cash-out refi and refinanced the secondary to a total of $550k, the IRS would view the $50k increase to the primary mortgage as a $50k home equity loan, right? Despite the total debt staying the same.

Based on the Pub. 5703, it appears they would look at each qualified debt individually. If either mortgage is larger after refinancing, the difference would be considered a home equity loan subject to the new $750k limit (reduced by the total grandfathered debt), even if the other debt was reduced to keep the total debt level the same. Just want to hear other interpretations.

[rbynaker · Accepted solution]

I think you're on the right track.  Follow the money.  One technical correction, the home equity limit is $0.  If the extra $50K cash-out on the refi #1 is used to substantially improve home #1 then it becomes $50K of home acquisition debt.  But it counts as "new" loan proceeds and would be subject to the $750K  limit (which you're already in excess of).  If it's used to pay off a car loan, go on vacation, etc. then it's subject to the $0 home equity debt limit.  Either way, the interest is not deductible.  You do still need to track it though since, if it's used for improvements, it may become relevant in the future when the total acquisition debt loan balance drops below $750K (i.e. if home #2 is sold and that loan paid off, then suddenly it matters what your $50K cash was spent on.)

Are we having fun yet?

I suspect anyone using TurdoTax will just deduct the whole thing.  I also suspect I'm in the minority of paid preparers who are actually tracking this stuff.  Most of this is just going to go from the 1098 to Sch A without anyone batting an eyelash. 😞

Rick

[sjrcpa]

I am part of your minority

[TAXOH]

Count me in...I was thinking the same thing.

[itonewbie]

Same here.

[abctax55]

Me four....despite the extra time involved...

[mysanity88]

I appreciate the feedback. Excellent point on still needing to keep track of the home equity portion, as it could come into play in the future. I am glad I am not alone in tracking this information for clients. A little extra work goes a long way in helping to keep a client compliant and happy. Cheers!

[rbynaker]

My crystal ball's not very good, but I wouldn't be too shocked to see home equity interest come back and/or the limit go back up after the housing market tanks and then we need a stimulus package.

[Marc-TaxMan]

MY crystal ball shattered many years ago, but my guess is they will not bump these deductions.  If you count only the States on Trump's Nice List, I think the 2018 home mortgage limits are way above median home prices.