Refinance mortgage loan implications

[jyeh74]

Turbo tax states at this link

https://turbotax.intuit.com/tax-tips/home-ownership/deducting-mortgage-interest-faqs/L4a9KF9mI

"Deductible mortgage interest is any interest you pay on a loan secured by a main home or second home that was used to buy, build, or substantially improve your home. For tax years prior to 2018, the maximum amount of debt eligible for the deduction was $1 million. Beginning in 2018, the maximum amount of debt is limited to $750,000. Mortgages that existed as of December 14, 2017 will continue to receive the same tax treatment as under the old rules"

How does this work if say a $1m loan is taken out before 2018 but a refinance happens after 2018?  Is the $1m loan refinance now considered a new loan that is subject to the $750,000 max limit?

[Carl]

IRS Publication 936 for the 2020 tax year is still "in review" by the IRS. Therefore I"m not using that version. I'm using IRS Pub 936 for 2019 which you can see at https://www.irs.gov/pub/irs-prior/p936--2019.pdf

Now if I go page 10, Grandfathered Debt, from what I read that section doesn't apply to you at all since the original mortgage you refinanced was not taken out prior to Oct 14, 1987. As I see it, the limits apply to you.

[jtax]

For acquisition debt for a qualified personal residence incurred before 12/15/2017, the $1M limit applies as long as you don't refi for more money than you owed just before the refi.

However the you only get the deduction higher limit until the original mortgage would have ended. I.e. you can't extend the term and get the higher limit. That would only seem to matter until 2025.

Here's the detailed logic supporting that statement.

The law about deduction of mortgage interest is 26 U.S.C. 163(h)(3) ... https://www.law.cornell.edu/uscode/text/26/163

• 163(a) says you can deduct all interest unless there is an exception below.
• 163(h) says you can NOT deduct any interest for personal interest
• 163(h)(2)(D) says "qualified residence interest" is not personal interest
• 163(h)(3)(A)(i) defines "qualified residence interest" to include acquisition debt for a qualified residence
• 163(h)(B)(i) defines "acquisition" debt to mean debt used to acquire or substantially improve a qualified residence, which is secured by the residence.

It also says the critical thing:

Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

So a refi of acquisition debt is still acquisition debt as long as you don't take out more than you owe. (I thought I that the loan time couldn't also be extended but that is not in the statute.)

• 163(h)(3)(B)(ii) has the $1M limit. 
• 163(h)(3)(F) has the special rule for 2018 through 2015. 
  • 163(h)(3)(F)(i)(II) says make the limit $750k not $1M.
  • 163(h)(3)(F)(i)(III) says for debt "incurred on or before 12/15/2017" the (F)(II) $750k limit change shall not apply.
  • 163(h)(3)(F)(iii)(I) says the purposes of the deduction limit the date of a refi is deemed to be the date of the original mortgage.
  • 163(h)(3)(F)(iii)(I) says however that you can only get the higher limit for the original mortgage term (i.e. if the refi extends the term you will get the lower limit once the original term would have been over). That would seem to not matter once the $1M limit comes back in 2026. If it does.

[jyeh74]

OK, so the original loan was taken out in 2014 for right under $1m.  It was refied multiple times, recently in 2019 and 2020.  The outstanding balance has gone down.  So in 2014, my limit was up to $1m, but now that I refinanced in 2019 and 2020, am I still at the $1m limit or does the refinance cause me to be at the $750k limit?

[jtax]

@Carl nice as IRS publications are, if not available you have to go to the statutes and regulations. Publications cannot overrule statutes/regs and if in conflict the law wins. See my detailed quote of the statute for what the rule is.

[jtax]

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@jyeh74 wrote:

OK, so the original loan was taken out in 2014 for right under $1m.  It was refied multiple times, recently in 2019 and 2020.  The outstanding balance has gone down.  So in 2014, my limit was up to $1m, but now that I refinanced in 2019 and 2020, am I still at the $1m limit or does the refinance cause me to be at the $750k limit?

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If you did not take out more than you owed your limit is $1M.

However, you can only take that limit (rather than $750k) for the length of the original mortgage.  [For example if the original mortgage were for 10 years, i.e. ended in 2024, then you could not use the $1M limit in 2025.]

[jyeh74]

So a refinance does not mean a new loan?  So I’m curious as to why the two 1098 box 3 say different dates?  One shows the original 2014 date and one shows a 2020 date.

[jtax]

Here is the language of the statute. You will have to make your own judgement:

https://www.law.cornell.edu/uscode/text/26/163

(iii)Treatment of refinancings of indebtedness

(I)In general

In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

(II)Limitation on period of refinancing

Subclause (I) shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).