How to handle cash out refinance when only part of the money was spent this tax year?

[Darkhog]

I am adding an addition to my house.  We started in first half 2020, paying a GC to draw up plans, submit permits, etc.  This is a fraction of the total cost.  We then refinanced in November, cashing out a sum of money to use on the addition which we hadn't started building yet.  Using some fake numbers to make it easy, suppose -

Loan balance was 200k, refinance was 300k, cashing out 100k.

Payment to the GC to draw plans and permits was 5k, and this payment was made in 2020 before the refinance.

Total cost of addition is expected to be 125k.

I refinanced through a mortgage company that immediately sold the loan, so I have 3 form 1098s - #1 from original loan, #2 from the refi company (temporary), and #3 from the final loan company who now owns the mortgage (titled "Substitute Form 1098).  Each reports interest.

1098_1 = 8000 interest (this one is "normal" from pre-refi)

1098_2 = 150 interest, loan origination date 10/15/2020, outstanding principal 300k

1098_3 = 2000 interest, mortgage acquisition date 11/12/2020, outstanding principal 300k

Can I consider the 5k spent to draw plans and permits cost to improve the residence?

How do I go about reporting this in my 2020 taxes?  I assume the second and third 1098 interest will be affected, but even after I answer the loan is Refinanced and Pulled Cash Out = Yes, it doesn't ask me about expenses.

Assuming I complete the addition this year, or at least 100k worth, I assume I'll have some semi-complicated calculations for interest for 2021 Taxes.

In 2022, all the money would have now been spent on improvements to the home, and now I assume it is all deductible.  Correct?

[Opus 17]

If you only paid $5000 toward your improvement so far, then your acquisition debt on the new loan is $205,000, or 68.3% of the balance, so 68.3% of the interest is deductible.  Turbotax should help you figure this out, but I've seen reports that it is not handled well, so you might just enter the 1098 and report 68.3% of the interest and say that it was all used to buy or build.  The IRS only gets the final interest number.

For next year, Turbotax should again help with the calculation and it will be easier if you don't have multiple lenders.  I think Turbotax uses a first month/last month averaging method, although this is not quite how it is described in the IRS publications.

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

Per publication 936, you need to determine your average acquisition debt for the year by averaging the acquisition debt for each month.  So you will need to save your monthly mortgage statements.  As you spend money on the improvements (your draws), your acquisition debt will go up.  Once you have your average acquisition debt for the year and the total interest you paid for the year, there is a formula to determine the percentage of your interest payments that are deductible as acquisition debt. 

Also note, your debt only counts as acquisition debt if the work is completed within 24 months of taking out the loan.