Cash Back Re-finance

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I am considering a cash back re-finance of my home mortgage.

What are the tax implications?

N

NCpersonAnswer

Level 15

Google “IRS publication 936 PDF”, page 12 at the bottom left.

“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.)”

so the specific timing of the home improvments and when you complete the cash out refi is critical. If you wait more than 90 days after completing the home improvments to do the cash out, the cash out portion is not deductible.

From your earlier question, the mortgage company is not able to separate out what portion is deductible on Sch A and which part is not. But it is rather easy to determine. Here is an example.

Let’s say your prior mortgage had a $300,000 balance at the point of the cash-out refi. Upon closing of the new mortgage, the balance is $350,000 at 6% interest. Assume none of the cash-out qualifies as an improvement (and in your case, let’s assume the dates were missed).

Simply, the tax-deductible interest is $300,000 (the old balance) times 6% or $18,000. Anything above that on the mortgage statement is not deductible. Eventually, the loan will amortize down to below $300,000 at which point all the interest is deductible.

does that help?

DoninGA

Level 15

The cash you receive from a cash-out refinance is a loan, not taxable income. However, you can only deduct the interest on that newly acquired cash if you use the funds for substantial capital home improvements. Interest on cash used for personal expenses (like debt consolidation) is generally not deductible

P

plpollackAuthor

Level 5

@DoninGA

Thanks for the prompt reply.

So, I assume mortgage Form 1098 includes this info, and Turbo Tax excludes that part of my interest paid from Schedule A?

Also - suppose the home capital improvements have already been made and paid for in this year, or last year, but the re-fi cash back is now reimbursing me for monies already spent?

P

plpollackAuthor

Level 5

deleted

N

NCpersonAnswer

Level 15

Google “IRS publication 936 PDF”, page 12 at the bottom left.

“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.)”

so the specific timing of the home improvments and when you complete the cash out refi is critical. If you wait more than 90 days after completing the home improvments to do the cash out, the cash out portion is not deductible.

From your earlier question, the mortgage company is not able to separate out what portion is deductible on Sch A and which part is not. But it is rather easy to determine. Here is an example.

Let’s say your prior mortgage had a $300,000 balance at the point of the cash-out refi. Upon closing of the new mortgage, the balance is $350,000 at 6% interest. Assume none of the cash-out qualifies as an improvement (and in your case, let’s assume the dates were missed).

Simply, the tax-deductible interest is $300,000 (the old balance) times 6% or $18,000. Anything above that on the mortgage statement is not deductible. Eventually, the loan will amortize down to below $300,000 at which point all the interest is deductible.

does that help?