Do we continue to report that cash out from the original refinance?
Yes. But the percentage of the interest you can claim will be lower, assuming none of the cash out was used to maintain or improve the property that was refinanced. Here's an example, building on the previous example.
Original loan: $80,000 All interest is 100% claimed on SCH A.
10 years later at time of refi, balance on original loan is $60,000. Refi'd for $100,000 and did not use the $40K cash out to maintain or improve the home. Only 60% of the interest can be claimed on SCH A for the life of this new loan.
SCENARIO 1: Another 10 years pass and you now owe $80K on the $100K refi loan, and you refi again for $100K to cash out $20K. You do not use any of the cash out to maintain or improve the home that was refinanced. Of the $80K owed on the loan (the 2nd loan) only 60% of it applied to the balance of the original loan> that's $48,000 you owe on the the property, of the original loan used to initially purchase that property.
So for the new loan (the 2nd refi) of $100,000, only 48% of the interest paid on that loan can be claimed on SCH A for the life of that loan.
SCENARIO2: Another 10 years pass and you now owe $80K on the 100K refi loan. You refi again for the $80K owed on that loan, with no cash out. Nothing changes, as you can still only claim 60% of the interest paid on the loan, each year, for the life of this new (3rd) loan.
