Primary home mortgage loan payoff and then refinanced with cashout in 2017 followed by another cashout refi in 2018. How to calculate eligible interest for tax deduction?

[Customer1001]

With the new tax laws, cashout refinance seems like a mess indendent of when it was done. I bought my primary home in 2005 with a loan of 500k. Later in 2012  i brought down the pending loan amount to 100k by paying off the balance. I refinanced to 700k loan with cashout refinance in 2017. I followed it with  another cashout refi in 2018 to 900k. I did not use the cash for improvement of home. With new tax laws i am confused on how to calculate the interest eligible for deduction. Should i use 500k or 100k or 700k or 900k as loan amount to calculate my eligible interest? I do not have the details of exact loan amount before doing cash out refinance. Thanks for the responses!

[Vanessa]

You are going to have to do a bit of math on this one.  The interest that would be deductible is the interest that was paid on the $100K that still remains as part of your balance.

Your mortgage balance in 2017 would have been less than the $100,000.  So, you will need to obtain that number in order to do all of the calculations. 

An example of how to calculate this number is below. 

If you refinanced your home in 2017, with a balance on your mortgage of $70,000 and brought your mortgage balance back up to $700,000, then you would only be able to deduct 10% (70k/700k=10%) of the mortgage interest as only 10% of the balance was used to buy, build or improve your home.

Since you refinanced again, that 10% was diluted even further.  If in 2018 right before your new refinance was $650,000, then only $65,000 (10% still) would be used to buy build or substantially improve your home.  So, when you refinance and have a new balance of $900K, only 7.222% (65,000/900,000=.07222) would be allocable to the original mortgage balance. 

With no further refinancing, this means 7.222% of your principal and interest was used to buy, build or substantially improve your home.  So, you could only deduct 7.22% of your interest paid for the current tax year. 

[Customer1001]

Thanks for the respone! Wanted to check if this is a change only for 2018 tax return or has it always been this way. This would be a big reset for lot of home owners in places where they tapped into home equity due to increasing home prices over many years with tax laws allowing to do so, but suddenly law changing in 2018 to pay tax for something that was done 10 years ago and had positive tax implication