@Sri16
This is a very confusing section of the publication, and I wonder if it correctly summarizes the regulation.
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.
Let's break that down. I sign a contract to remodel my kitchen on January 1, 2024. I have to pay 1/3 down, 1/3 on start, and 1/3 on completion. I take out a second mortgage on January 10, 2024. I pay my contractor deposit on January 15. Work starts on March 1 and I pay. The job is completed on May 1 and I pay again. If this rule is written correctly, NONE of my 2nd mortgage is acquisition cost, because none of the work was completed before January 1, 2024.
That does not seem correct. And I don't think it is correct. Let's go up the page a bit.
Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home
That seems clear that if I take out the second mortgage and use the proceeds to pay my contractor, then it must qualify because I used the proceeds to improve the home.
A little further down,
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.
This limitation clause makes no sense if rule #2 is controlling, because if rule #2 controls, then refinancing a home can never increase the acquisition debt even if you use the proceeds to pay for your improvements. So there is no need to add the limitation clause. The rule would simply be, "new debt will only qualify as acquisition debt up to the previous balance" and refinancing to make an improvement would never be deductible unless you paid for the improvement out of pocket first, and we know that doesn't happen, nor is it the intent of the regulation.
Finally, we have to look at the header that precedes those rules.
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:
So the special rules only apply if you don't use the funds to directly pay for your improvements, they only apply in situations where you borrow the money long before or long after the improvement.
In other words, the special rules set limits on your ability to borrow money and say that it retroactively applies to past improvements. The special rules do not set limits on the standard case where you borrow money and use it to make improvements, the special rules only set limits on the special case where you borrow money and don't use it right away. The special rules set limits on how far back you can retroactively claim that your loan paid for an improvement, and they set limits on how long you can hold the money in your mattress before you make the improvements. But I don't think they apply to the "standard" case where you borrow money and use it to pay for your improvements in a reasonable time frame.
