Can I deduct any interest on a refinance loan where I took out some cash but most paid for my primary residence?

[cind408024]

My original loan was $261,577, I refinanced $309,000 and took out $39,000 cash. I used the cash to pay a debt and make a purchase not home related. Can I deduct some of the interest on my new (refinance) loan?

[Carl]

My original loan was $261,577

I take it that was your loan "balance" on the closing date of the refinance.

, I refinanced $309,000 and took out $39,000 cash.

The math doesn't seem to work here. $309,000 minus $39,000 comes to $270,000. But I'm going to assume the $8,423 difference is closing costs on the refi.

Since the cash out was not used to buy, build, or improve your main home, the interest on that amount is not deductible anywhere on your tax return. You can only claim as a SCH A Itemized deduction the percentage of interest that is equal to the percentage of the refi that was used to pay off the original loan. I get a figure of 84.6%.  Therefore, only 84.6% of your mortgage interest is deductible as a SCH A itemized deduction.

[Opus 17]

Yes, you can deduct the portion of the new loan that is acquisition debt.  Some of the closing costs on the new loan will also count as aquisition debt, so your deductible percentage will be a bit higher than 84.6%.  Closing costs that can be counted as acquisition debt are the same closing cost that count as adjustments to cost basis and are listed in publication 523.

https://www.irs.gov/publications/p523

Also, you can consider that you are paying off your equity debt first, and your acquisition debt last.  That will gradually increase your deductible percentage over time.

Lets assume that you refinanced on June 15, and your acquisition debt including allowable closing costs was $265,000.  On that day, your percentage of deductible interest was 85.8%. (265,000/309,000=0.8576, and you round to three decimal places, so 85.8%).  By December 31 your mortgage balance is $302,000, so your percentage of acquisition debt is now 87.8%.  Taking the average, you can deduct 86.8% for that year.  Next year, you start with 87.8% acquisition debt and might end up with 90% percent of aquisition debt, so you can deduct the average again.  Turbotax will do this calculation for you.  As you gradually pay off the loan, you pay off the equity debt first and eventually, the entire loan will be deductible.