Closing costs are generally includeable in qualified acquisition costs for purposes of determining mortgage interest deductibility.
Your situation is somewhat more complicated because you were buying out your spouse’s share of equity. If the original mortgage that you refinanced only included acquisition debt, and the only thing you used the cash out for was to buy your spouse’s share of the home, then the new loan is all deductible acquisition debt as well. However, if the original mortgage that you refinanced also contained equity debt, then that part of the debt is not qualified for the interest deduction even though you had to pay off your spouse.
On any mortgage or refinance, closing costs can be included in the acquisition debt as long as they are ordinary and reasonable for your part of the country and do not represent hidden cash out amounts. For example, I recently answer the question for a homeowner who borrowed the money for their escrow deposit as part of their refinance. Since the escrow deposit will be used to pay property taxes and insurance in the future, and the money in the escrow account is technically the property of the homeowner until the bills are paid, this would be considered cash out equity debt, and the borrowrr’s loan balance ended up being two or 3% equity debt and 97% acquisition debt. That would mean that technically only 97% of the interest is deductible, if he was audited.
