I refinanced my home with 50k cash out in late 2018. The cash out is for improvement, but I didn't complete spending in 2018. Can I deduct interest/costs?

[Matt15]

This is for my primary home. TurboTax counted the points I paid and the interest as deductable because I answered yes to the question that the cash out was for home improvement of my primary home (I only have one mortgage and one home). With contractor scheduling, I only got ~$6000 of the 50k spent in 2018.  The rest will be spent by the end of this year.  All the work is by licensed contractors with invoices and such, so documenting that I spent more than 50k on the house after the closing of the loan will be very easy.

I've held the money in a separate account since the refi, and every cent of what I got in cash, including the interest, will be spent on home improvement. I transfer money out of holding only to write milestone checks on the work.  One project is done and the other is progressing.

However, some of the money was applied to loan costs at closing, so I got less than 50k in cash.  My final spending will still be more than 50k.  I don't know if that complicates things or not.

Is TurboTax right that the interest all counts and I can deduct the points as well since the money WILL be spent on home improvement?  Or do I have to do something complicated and manual because I only spent part of the money in 2018?

[Vanessa]

Is TurboTax actually telling you it all counts because it WILL be spent?  Or are you saying that because when you select "Yes, I've used this loan only on a home I took it out on"

[Opus 17]

Legally, you have up to 2 years after taking the cash out loan, to complete improvements and consider it qualified acquisition cost for the mortgage interest deduction.  

[Vanessa]

You actually do need to do a calculation. The future home improvement costs are not deductible because you have not yet used it for the home improvement. 

So the $44k or whatever the exact amount is, cannot be included in the mortgage amount for the deductible interest.  

When asked "Have you used the money for this loan exclusively, you will need to say no.

Then you will enter the amount that has been used for the home.  If your total balance is $450,000 and you have $44k sitting in the bank then the answer would be $406,000.

[Vanessa]

Mortgage treated as used to buy, build, or substantially improve home.

A mortgage secured by a qualified home may be treated as home acquisition debt, even if you don't actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1, later.)

2. You build or substantially improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

3. You build or substantially improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2, later.)

https://www.irs.gov/publications/p936#en_US_2018_publink1000229891

[Opus 17]

I think there is a misunderstanding here, note the introductory statement.

A mortgage secured by a qualified home may be treated as home acquisition debt,** even if you don't actually use the proceeds to buy, build, or substantially improve the home**. This applies in the following situations.

Here the taxpayer IS using the proceeds to substantially improve the home, so I don't think any of the three conditions below apply.  I think that, since the taxpayer IS using the proceeds to improve the home, this other statement applies,

Home under construction.
You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.

The 24-month period can start any time on or after the day construction begins.



Alternatively, this paragraph supports your first answer.

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.**


That would mean that the debt not yet paid to the contractor is equity debt for now, but become acquisition debt as soon as paid to the contractor.  The "beginning 24 months before the mortgage" rules don't apply because this loan is being used to remodel the home, just not all at once.