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How to deduct Refinance home mortgage

Forum|Forum|5 years ago
January 19, 2021
2 replies
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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!

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Best answer by rbynaker

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

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agree with my colleagues but FYI things may get wonky after TCJA expires in 2025 (or if significant portions of it are repealed before then).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.)

sjrcpa

Level 15

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.

The more I know the more I don’t know.

rbynakerAnswer

Level 13

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

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agree with my colleagues but FYI things may get wonky after TCJA expires in 2025 (or if significant portions of it are repealed before then).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.)

S

skyworksAuthor

Level 5

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?

T

TaxGuyBill

Level 15

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.