Mortgage interest deduction limit on a refinance mortgage

[ethan4]

In 2017 I took out a mortgage for $900K. In 2019 I refinanced it, taking no cash out. I have read on many many websites that I get to keep my existing mortgage limit from 2017, not the new $750,000 limit.

https://www.bnncpa.com/resources/mortgage-interest-whats-deductible-now-and-should-i-refinance/

https://www.thebalance.com/mortgage-refinancing-tax-deductions-1799218

https://www.hsh.com/refinance/how-does-a-refinance-affect-your-taxes.html

https://www.marketwatch.com/story/did-you-refinance-your-home-mortgage-last-year-you-can-still-quali...

https://www.nolo.com/legal-updates/new-tax-law-caps-limit-on-home-mortgage-debt-deduction-at-750-000...

Not a single one of those sites points me at anything from the IRS which agrees with them. Nothing in my 1098 mentions that it's a refi from a 2017 mortgage. I've read the IRS publications, but all I can find is that pre-1987 debt is grandfathered. Could someone point me to something "official" from the IRS which confirms that I can fully deduct interest on my 2019 refi?

Thanks,

-- Ethan

[KarenM90]

Yes, if your original mortgage debt was incurred prior to 12/15/2017 and was refinanced in 2019

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 Pub 936

So, for 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 2019.  The refinanced debt term can be for 22 years or less for the mortgage interest to be fully deductible under the "grandfather" rules.

[ethan4]

That publication defines grandfather debt as debt from 1987 or earlier:

"If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt."

So this doesn't apply to me.

[KarenM90]

Here is a MarketWatch Article that states has the same information regarding refinanced loans:

"New rules for mortgage refinancing

For those individuals with a mortgage on their home prior to Dec. 15, the $1 million limit continues to apply if you refinance your mortgage to lock in a lower interest rate.

But if the refinancing is also used to increase the size of the mortgage, interest on the additional debt can’t be deducted."

Here is a link to the article:  Mortgage Interest

[caz1]

Hi @KarenM90 

My original loan was in 2016 for $1.17 million for 30 years.  I'm refinancing now in 2020, to lower my rate on a new 30 year mortgage.  My principal at time of refinance is $1.01 million.  I'm borrowing an additional $4k for closing costs.  My understanding from is:

1. I can continue to deduct the interest on the $1.01 million (adjusted proportionally to the old $1 million debt cap) for the remaining duration of the refinance loan

2. I cannot deduct interest on the $4k for closing costs.

Is my understanding correct?

[ethan4]

Truthfully, no one answering here has the depth of knowledge to give a definitive answer. I don't know about the extra $4K for closing costs. Your mortgage deduction was originally limited to $1M of mortgage, so I think you've got the same limit now, given your circumstances. But I am definitely not an expert. Nor, apparently, is TurboTax.

[NCperson]

Frankly, I would not worry about it and assume it is all tax deductible.... here is why

while the limit is $1mm in your case, as you are refinancing 2016 debt, that $1mm is the AVERAGE for the year.

So even if we use the 'worst case' of $1,005,000 as the beginning balance, and the mortgage amortized over 10 remaining months of 2020, and assuming 4% interest for 30 years, the AVERAGE will be around $999,000 for the year. 

your are under the $1million cap.

[cummingscm]

Pub 936: 

Refinanced home acquisition debt.

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.

[HuntlyG]

If I refi'ed in 2019 for $1Million, how does TurboTax know that refi was for a house purchased many years ago and that I am grandfathered to get a deduction up to 1Million and not just 750K? The 1098 only states the mortgage origination date and nowhere on TT does it ask when you originally purchased your home. I obviously want to make sure I get the full deduction and that TT doesnt think that I purchased my house in 2020 which would only give me a deduction of up to 750K. 

[ethan4]

Unless they fixed it since last year, TurboTax gets this completely wrong and miscalculates your tax returns. But it's OK because there is no way to contact TurboTax to let them know. 8-)  All we can do is talk about it here.

Just lie to TT and tell it you're still on the original mortgage.

BTW, it isn't settled law yet what happens if your original grandfathered mortgage was over $750,000 and you then re-fi it and take cash out. The tax lawyer I consulted said that it may end up that you lose the grandfathering by doing cash-out, but more likely that only the original amount is grandfathered. You can't take a $800,000 mortgage pre-2017 and re-fi it into a $1M mortgage and claim the full deduction on $1M.

[JamesG1]

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause  the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available here.

See also this TurboTax Help.

[cummingscm]

I called and reported this issue to TurboTax on 1/31/21, but I don't have confidence they will fix it.  I will check future updates to see if they do.  In the meantime,  I ended up manually overriding the home interest deduction worksheet in the Forms view (TurboTax Premier PC download version, button in the top right, look for "Ded Home Mort" form).  If you click on the number, you can overwrite the calculation.  On line 1, put the average value of original acquisition debt.  If you cashed-out, reduce it to only be the acquisition debt.  Then on line 7, put the cash out value (or $0 if no cash out).  Then line 11 should accurately calculate your original acquisition debt and apply toward the 1098 interest reported in line 13.  Hope that helps!  Like if it did. 🙂

[PattiF]

Some TurboTax customers are experiencing an issue with their Home Mortgage Average Balance. This can cause the Home Mortgage Interest to be incorrectly limited.

If you're experiencing  the issue above,  please go here to receive email notifications when any updates related to this issue become available.

[cummingscm]

I received a notification that this was fixed with today's update (2/11/21), but it is still not calculating refinanced original acquisition debt correctly for purchases prior to 12/16/2017 with 2020 average balances between $750,000 and $1M.  IRS Pub 936 clearly calls this out.  TurboTax needs to update the home interest deduction worksheet.

[ethan4]

The two most recent posters from TT in this thread are saying that this is related to an issue with average balance calculation, which is obviously unrelated to this discussion. Perhaps replying to lots of things raises their performance scores.