@W00Dtaxed wrote:
The Home Equity loan of $44,000 was used to insulate and reside our house and also refurbish our 2 bathrooms. There were $10,000 in unsecured loans consolidated in the new home loan. So, the $44,000 can be claimed still? The other $10,000 can not?
You have to determine your qualified acquisition debt. This is debt used to buy, build, or improve ("make substantial improvements to") your main home. This is something you have to trace yourself.
- For example, you originally bought the house for $150,000 with a $125,000 loan. That mortgage is still in place and your balance was $116,000. That is qualified acquisition debt.
- Then, you took out an HELOC for $44,000 that was entirely used for substantial improvements. That is also qualified acquisition debt.
- You refinanced to $170,000 and did not make any more improvements. Your qualified acquisition debt is $116,000+$44,000=$160,000. That means that 94.1% of your debt is qualified acquisition debt so 94.1% of your mortgage interest is deductible.
To correctly figure the amount of deductible interest, you are allowed to assume that you are paying off non-qualified debt first, then you can determine the percentage on a month to month basis, or use the first month/last month method. For example, on January 1, your loan balance was $169,000 and on December 31 your loan balance was $164,350. Your qualified acquisition debt stayed at $160,000 the whole year, so in January it was 94.7% qualified and in December it was 97.4% qualified, so the average for the year was 96.1%. As soon as your balance goes below your qualified acquisition debt, the mortgage will be 100% deductible again.
I'm not sure exactly how Turbotax calculates this but that is the result you should get. And you should use as exact figures as you can prove. If audited, the IRS does not have to award any deduction you can't prove with adequate records.
