HELOC Exceeding mortgage limits

[msmithva]

I have a principal mortgage that was taken out in 2003 with a current balance of $980,000 (under the $1M deduction limit).  In 2020, I took out a $250,000 HELOC which was used exclusively for home improvements.  Can I deduct the interest paid on $20,000 of the HELOC or is that excluded because the loan is not grandfathered into the higher limit?

Thank you!

[NCperson · Accepted solution]

see the worksheet at the link below - page 12- it's not grandfathered 

https://www.irs.gov/pub/irs-pdf/p936.pdf

[msmithva]

it does appear though that the limits are the original limits ($1M) apply to the combined total and the HELOC can be used up to that point.

[NCperson]

I do not think so, did you work through the form? here is what I got:

none of the HELOC interest is currently deductible but it will be in future years as the 1st mortgage amortizes to make room for the HELOC.. The combined balances would have to be below $750,000 for the HELOC interest to be deductible.. Only the 1st mortgage is grandfathered against the $1,000,000 limit; the HEOC can't be added to the grandfathered amount (which your response appears to assume)

Further, if you had the mortgage since 2003, did you cash out along the way? if no, then no worries.  if yes, then excluding any of the cash out that didn't go to improvement would be necessary to determine the right answer. 

Line 6 = $980

line 7= $250

line 8 = $750

line 9= $980

line 10= $1230

line 11 = $980 - this is the mortgage limit for interest deductibility of the interest. 

[msmithva]

Thanks for your reply!  Using specific numbers:

1	0
2	970018
3	1000000
4	1000000
5	970018
6	970018
7	54076
8	750000
9	970018
10	1024094
11	970018
12	1024094
13	39131
14	0.94719625
15	[social security number removed]
16	2066.26341

it appears that I must deduct $2,066 from my total paid Interest as a deduction.  The problem is that the second loan (HELOC) only had interest payments of $1,412 in 2020.  It seems like it is better to not include it at all or am I reading this wrong?  I would have thought that I could deduct the HELOC interest on the delta of like 2 and 3...

[NCperson]

first, your average HELOC has to use zeros for the months earlier in the year before you took out that loan, that is why you are getting $2066 not deductible even though there was only $1416 of interest on the HELOC.  Curious what you get when you try it aqain.

as far as you thinking the difference between 2 and 3 would be deductible, the First mortgage is grandfathers...you can't add in the new HELOC and expect it to be grandfathered as well.  

The limit is $1,000,000 on money borrowed prior to 2017; the HELOC was not borrowed prior to that date so it doesn't get grandfathered in the the $1mm limit.

Lastly, if the mortgage is 17 years old against a normal 30 year amortization, it will amortize rather quickly at this point...   did you cash out (i.e. the balance go higher) if you refinanced along the way or this you take this mortgage out in 2003 with no refinances along the way?  it makes a differnce 

[msmithva]

Thank you again for spending so much time on this!  I used <$0> for Jan-Aug and had a balance for the remaining 4 months of 100000, 100000, 200000, 248921 for a monthly average of $54076.75.

Are you saying that none of the HELOC can be deducted until my mortgage falls below $750,000?  I have not refinanced this mortgage since I took it out.

Thanks again!

[NCperson · Accepted solution]

that should be the case....suggest working through the spreadsheet and assume on the first pass that the 1st mortgage is $800,000 and on the 2nd pass it is $690,000.  see what happens. 

again since the new maximum loan that is deductible is $750,000, any mortgage above that in 2017 was grandfathered in, but that doesn't mean you can borrow more money up to the $1mm limit and expect that new money to be grandfathered in.