How to Enter Cash Out Refinance? (2021)

[poeinator]

Scenario:

• Cash out refinance in 2021
  • Original loan had a balance of $300k
  • Refinanced for $450k ($150k cash back)
• Received 2 1098's (original mortgage and refinance mortgage)
• Cash received during the refinance was not used for improvements to home (used for other things)

In TuboTax, on the refinance 1098, I answered yes to:

• Is this loan a home equity line of credit (HELOC) or a refinance of a previous loan?
• Did you take cash out when you got this loan?

Then on the question "Have you used the money from this loan exclusively on this home?" answered:
"No, I used some or all of this loan on a different home or something other than a home."

I am now confused what to enter on the following items:

• What was the original amount of the loan?
  • Should this be the original loan payoff of $300k or the refinance loan amount of $450k?
  • When I entered the refinance loan amount of $450k, it said the interest wasn't deductible. Seems like the form questions aren't really entirely accurate.
• How much of your loan did you use to build, remodel, or repair the property it's secured by?
  • Since I did not "build, remodel, or repair", I assume this should be zero.
  • In other discussion posts, I've seen mention of "buy, build, or improve". Did "buy" get erroneously dropped from the question text and I should enter $300k here?

Can a tax expert please provide guidance?

[DMarkM1 · Accepted solution]

First I recommend deleting all the forms 1098s and start with a clean slate.  

Next enter the original loan 1098 and be sure to answer "No" this is not the latest (most current) form 1098.  

Then enter the current loan 1098.  Answer "Yes" this is the most current 1098.  Answer to indicate it is a refinance and you cashed out and didn't use all the cash on the property. 

The amount for the top box "Original Loan" should be $450,000 (from box 2 on the form 1098).  The middle box is the amount used to buy, build. improve the property and should be $300,000 used to pay off the original loan.  The bottom box is the balance at the end of the year 31 Dec 2021 or 1 Jan 2022 depending on your statements.  

[poeinator]

Thanks @DMarkM1 ! That's what I suspected.

It would be great if the Turbo Tax team could correct the label on:

"How much of your loan did you use to build, remodel, or repair the property it's secured by?"

As you mentioned, "buy" is the keyword in the case of the refinance ("buy, build, improve"). Might be good if the team could also update/extend the help text on those fields.

Thanks again!

[Dhokama]

How can I review my 2021 filing. 
I tried doing a revision to view my filing. I hope It did not effect my filing. No changes were made.

I did not get to view what I wanted

[DMarkM1]

After filing your return no changes made in TurboTax will affect that tax filing.  You can however amend that return later, but you will actually have to efile or mail in the amended return for it to affect your tax account with the IRS or state tax agency.  

To view your return after filing sign in to your TurboTax account and either: 

• select Preview or print return if your return has been accepted, or
• Scroll down to Your tax returns & documents (select Show if needed) and select Download/print return (PDF).

Here is a link with more details if needed.

[MANI1346]

Thanks, since I refinanced and new lender paid off original loan and I cash out like this question, how many 1098 I  will get next year, I mean if I will get one 1098 next year how do I spilt out the numbers regarding mortgage interest for original loan and the cash out one?

Thanks

[MonikaK1]

If you had two lenders during a single year, with interest paid to each lender, both lenders should issue you a Form 1098 next year. 

If you only paid interest to the lender that paid off the original loan, then you can expect to receive just one 1098 and no interest to split between lenders. If you took cash back, that will decrease the amount of interest  you may deduct.

In either situation, answer all of the interview questions completely and accurately in the Mortgage Interest section and TurboTax will calculate the deductible interest.

TurboTax will ask the question "Did you use the loan for anything besides paying off the existing loan?" when you identify that a loan was a refinance of a previous loan. The current law doesn't allow you to deduct amounts as interest on a principal residence that were not incurred to buy or improve the property.

Check your loan records or your prior year returns to determine how much of the loan proceeds were used other than to pay off the prior loan.

Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.

See this TurboTax tips article and this help article for more information.

[MANI1346]

Thanks a lot.

I think I have three 1098. The first one is about first original loan ($750000) when I bought my house, the second one is from second lender which had bought my loan with original loan, but the third one is new lender which I refinanced and cashed out . For the first and second I am sure their interest are deductible, for the third one which the original amount raised up for $200000 how can I find out part of interest related to original amount ($750000) which is deductible. 

[MarilynG1]

For a cash-out refinance, if you used any part of it for your home, the interest on that amount is deductible.

For example, you obtained a new loan for 30K, of which 10K was used for remodeling/home improvements.  One-third of the mortgage interest would be deductible.

Here's more detailed info in this Mortgage Interest FAQ's, plus instructions for entering Multiple Mortgage Interest Statements.

@MANI1346 

[MANI1346]

Thanks, for example from $30k I used for home improvement $10000 and the rest I used for my personal expenses how do I prorate interset on 1098 while the amount of interest is for all the year 2024.

[Mike9241]

go to deductions and credits and then mortgage interest. properly answering the question should result in the proper proration of deductible interest. 

[Vanessa A]

If you are doing this in TurboTax you will take the following steps

1. Enter the 1098
2. Click through until get to "Let's get some details about this loan" and select whether it was a refinance or HELOC
3. A drop down will appear, select Yes for the question "Did you use your loan for anything besides paying off the existing loan"
4. Next select I used some or all of this loan on a different home or on something other than a home
5. Help Me figure it out
6. Enter the amount you used on the home and the ending balance of the mortgage
7. This will do the calculations for you.

As for how you actually do the calculations...

If you used $10,000 of the $30,000 for home improvements and the other $20,000 was for whatever not related to your home, then you would be able to deduct 1/3 of the interest.  (10k/30k=1/3=.333)  so if your interest was $3,000, you would be able to deduct $1,000.