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How to handle cash out refinance when only part of the money was spent this tax year?
I am adding an addition to my house. We started in first half 2020, paying a GC to draw up plans, submit permits, etc. This is a fraction of the total cost. We then refinanced in November, cashing out a sum of money to use on the addition which we hadn't started building yet. Using some fake numbers to make it easy, suppose -
Loan balance was 200k, refinance was 300k, cashing out 100k.
Payment to the GC to draw plans and permits was 5k, and this payment was made in 2020 before the refinance.
Total cost of addition is expected to be 125k.
I refinanced through a mortgage company that immediately sold the loan, so I have 3 form 1098s - #1 from original loan, #2 from the refi company (temporary), and #3 from the final loan company who now owns the mortgage (titled "Substitute Form 1098). Each reports interest.
1098_1 = 8000 interest (this one is "normal" from pre-refi)
1098_2 = 150 interest, loan origination date 10/15/2020, outstanding principal 300k
1098_3 = 2000 interest, mortgage acquisition date 11/12/2020, outstanding principal 300k
Can I consider the 5k spent to draw plans and permits cost to improve the residence?
How do I go about reporting this in my 2020 taxes? I assume the second and third 1098 interest will be affected, but even after I answer the loan is Refinanced and Pulled Cash Out = Yes, it doesn't ask me about expenses.
Assuming I complete the addition this year, or at least 100k worth, I assume I'll have some semi-complicated calculations for interest for 2021 Taxes.
In 2022, all the money would have now been spent on improvements to the home, and now I assume it is all deductible. Correct?