Original loan 2017 refinanced in 2020 rate and term or cash out for purpose of tax

[VillageoftheWolf]

We had an original loan of 708k in 2017. We refinanced to pay off mortgage assistance we also had when we purchased the house. When we refinanced in 2020 funds to borrower (us) was 0 shown on the documents and due from Borrower at Closing 04a Payoff to XXX  $96,440.00 04b Payoff to XXX $675,969.00.

Is this considered a rate-and-term/limited cash out refinance for the purpose of the question. Do either of these apply to you. The original loan was taken out on or before December 15, 2017 and the loan amount has not increased due to a cash out refinance. 

[RobertB4444]

Yes, this is a rate and term/limited cash out refinance.  

I don't know the date of the original loan - you said it was in 2017, was it before December 15th?  

Did you add in some money to take out as cash when you refinanced?  Or add credit card debt to the mortgage when you refinanced?  If so then the loan amount increased.

[VillageoftheWolf]

Thanks for the reply Robert it's much appreciated the loan was taken out in September of 2017. We did add in cash to close around $17,000. The loan amount did increase because the payoff to the original loan and mortgage assistance we had on the original mortgage.  For the purpose of the question "The original loan was taken out on or before December 15, 2017 and the loan amount has not increased due to a cash out refinance" Would I answer Yes since this is treated as a rate and term/limited cash out refinance. Sorry if the answer is obvious I'm not sure if the limited cash out refinance causes some type of nuance. Since the question just mentions a cash out refinance not rate and term/limited cash out refinance.

Payoff to XXXX $96,440.00 - mortgage assistance
Payoff to XXX $675,969.00  - original mortgage

[DaveF1006]

 Based on your numbers, the answer is yes to that question.  Here is a breakdown:

The IRS allows you to treat the new loan as "Grandfathered" (pre-December 15, 2017) as long as the new debt was used to refinance "acquisition indebtedness." Original Mortgage ($675,969): This is clearly acquisition debt.

1. Mortgage Assistance ($96,440): If this was a subordinate lien or "silent second" used to stay in the home or cover the original purchase/improvements, it is also considered part of the debt used to "secure" the residence.
2. Cash to Close ($17,000): Since you put money in rather than taking money out, you didn't increase the debt for personal spending (like credit cards or a vacation).
3. Because your total new loan is simply replacing the combined total of your previous home-related debts, the IRS views this as a "Refinance of Acquisition Debt." You are still within the $1 million grandfathered limit (pre-2018 rules) rather than the lower $750,000 limit.

To summarize.

1. Original Loan Date: Use the 2017 date to keep the $1M limit.
2. Is it a Refinance: Yes.
3. Did you take cash out: No (putting $17k in is the opposite of a cash-out).