Mortgage interest deduction for loan before 12/15/2017 and refinanced in 2020

[newTTuser]

I am using TT deluxe download. 

I have two 1098. one for 8months with original loan funded before 12/15/17 and second one for the refinance done in 2020. Original loan and refinanced loan both are above 750k.

I see this note while working on mortgage interest deduction:

Multiple 1098s related to a Refinance done in 2020

1. Input just 1 1098 to cover the refinance.
2. Gather all of your 1098s related to the refinance.
3. Separately add up the amounts in Boxes 1, 5 and any property taxes paid

4. Box 1, Box 5 and Property Taxes- Input the total amounts for each on the

refinanced debt
5. Box 2- Input the amount of debt on 01/01/2020.
6. Box 3- Mortgage origination date- Input the oldest date on your 1098s

related to the refinance

So, I followed the instruction and only made one 1098 entry. Added box 1,5 and property taxes and put correct amount and date for Box 2 and Box 3.  That made all the interest(from both 1098s) deductible. 

I also saw following note after making single 1098 entry. 

What if I refinanced?

If you refinance debt, the loan limitation is based on when the loan was originally secured, and not when the loan was refinanced.

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.

Examples:
Susan secured a $1,000,000 loan to purchase a home in July of 2017. She refinanced the loan in July of 2019 when the loan balance was $950,000. Susan's new refinanced loan has a loan balance of $950,000. She does not have a loan interest limitation as her loan was originally secured to buy the home before December 15, 2017.

George secured a $750,000 loan to purchase a home in January of 2019. In August of 2019 George refinanced the home when the loan balance was $740,000. George obtained a new loan for $800,000 to refinance the outstanding home loan, but uses $60,000 to pay off credit card debt and for closing costs on the refinance. George would be limited to deducting only interest paid on $740,000 of debt.

For more information, please refer to IRS Publication 936.

So if the original loan is from before 12/15/17 and was refinanced in 2020, loan limitation, from mortgage interest deduction point of view ,still remains 1 million?

Also, if I do a cash back refinance and use the funds for home addition, I would be able to deduct full interest in that case also? 

[Cynthiad66]

Yes to both questions.

Taxpayers can deduct mortgage interest on up to $750,000 in principal. The debt must be "qualified personal residence debt," which generally means the mortgage is backed by either a primary residence, second/vacation home, or by home equity debt that was used to substantially improve one of these residences

Because of tax reform, you now have two possible 2018 ceilings on your home mortgages that are eligible for the mortgage interest deductions.

$1.1 million. For indebtedness incurred before December 15, 2017, you may not deduct interest on more than $1.1 million in mortgages ($1 million in acquisition debt and $100,000 in home equity debt used for acquisition or improvements).5 The original $1.1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017.

You can deduct the full amount of interest you pay on your loan in the last year if you did a standard refinance on a primary or secondary residence. You can only deduct 100% of your interest if you take a cash-out refinance, particularly if you use the money for a capital home improvement.

[newTTuser]

"The original $1.1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017."

Even if loan is refinanced in 2020, is it still considered as loan in existence before December 15, 2017? I thought refinance is considered a new loan from tax purposes and if you refinance after Dec 15, 2017 mortgage interest limit for upto 750k loan applies. If that is not the case I am glad to know about this. 

"You can only deduct 100% of your interest if you take a cash-out refinance, particularly if you use the money for a capital home improvement."

for example: Original loan from August 2017: 900k, refinance loan in 2020: 800k. if I do cash back refinance and make loan 1 million, I can still deduct the full interest on 1 million loan? Assuming 200k cash back money is used for addition to the home. 

Also, if I take additional 100k HELOC, so 1million loan and 100k HELOC on top of that, I still can deduct the full interest on both loan and HELOC? 

[DianeW777]

Yes, if your original mortgage debt was incurred prior to 12/15/2017 and was refinanced in 2020.

And with NO additional cash taken out, terms were not extended, and additional closing costs for the refinance were not covered by the loan funds, you would still qualify under the old  $1,000,000 limit.

Please see "Refinanced Grandfathered Debt" in this publication:  IRS Publication 936  (2019 as 2020 is not yet released as of this date)

Example:  If home acquisition debt was taken out in 2017 for $1 million for 30 years and the outstanding balance of $850,000 is refinanced in 2020.  The refinanced debt term can be for 22 years or less for the mortgage interest to be fully deductible under the "grandfather" rules.

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