REFINANCE

[W00Dtaxed]

We refinanced our house in 2018 to consolidate bills and to pay off a second mortgage. The new tax law about refinancing a house and what portion of the mortgage interest can be claimed is unclear to me.

Our original mortgage was $116,000 and we refinanced to a $170,000 loan, with $44,000 going to paying off a second mortgage and $10,000 going to pay off several other nonsecured depts. What portion would we still be able to claim? Does the $44000 going to pay off the home equity lone still count as going towards home improvement, as the 2nd home loan did? Or is the original loan of $116,000 all that can be claimed?

[NCperson]

The $116,000 is acquisition debt and the related interest is tax deductible. 

Beyond that, unless you used the money to improve your home (and suggest having details to support it),  it is not tax deductible. 

The assumption is that over time the non-acquisition debt gets paid down first, meaning less and less of the interest will not be tax deductible.   Once the outstanding debt is $116,000, all the interest is tax deductible. 

Question: it's not clear why you borrowed the $44,000.  Was that part of the transaction to buy the house or make improvements to the house?  

[W00Dtaxed]

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?

[NCperson]

the $44,000 is also "acquisition debt' since it was used to significantly improve your home. 

Unless the $10,000 was used to significantly improve your home, the related interest is NOT tax deductible

[Opus 17]

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@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?

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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.

1. 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.
2. Then, you took out an HELOC for $44,000 that was entirely used for substantial improvements.  That is also qualified acquisition debt.
3. 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.