@jyeh74 wrote:
@Opus 17 I remember asking about this in the forum and the response is that if the principal amount is decreased and the refinance is still for the original loan back in 2014, then the $1m limit still applies.
According to publication 936, the special rules for grandfathered debt only apply to debt that was originally taken out before October 14, 1987.
https://www.irs.gov/publications/p936#en_US_2019_publink1000229994
These rules state that if you had a mortgage from before that date, and you refinanced only the principle balance and took out no new money, the mortgage would still qualify.
Those rules do not apply to mortgages taken out after 1987. For mortgages taken out after 2018, the rules just say,
Home acquisition debt limit.
The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home and second home is limited based on when the debt is secured.
-
For debt secured after October 13, 1987, and prior to December 16, 2017, the limit is $1 million ($500,000 if married filing separately).
-
For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately). However, a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, is considered to have incurred the home acquisition debt prior to December 16, 2017.
The history is that prior to a major tax law rewrite in 1986, all mortgages were deductible. In 1986, the law changed so that only your acquisition debt up to $1 million, plus $100,000 of equity debt were deductible. Apparently, the law was written with a grandfather clause for pre-1987 debt. As far as I can tell, when the law changed again in 2018 to make all equity debt non-deductible and lower the limit on acquisition debt to $750,000, it contained no similar grandfather clause.
Each time you pay off one loan and acquire a new one, that is a new loan "secured by the home." Since your last loan was secured in 2019, you are covered by the new lower limits, not the old limit.
