1098 Mortgage Interest ReFi With Cash Out

[bq5]

My 2020 1098 is based on a refi loan from sept/2019 where all the cash out was not used for the home.  How long is the interest not deductible?  For each tax year moving forward?  For tax year 2019 I did not consider any mortgage interest for deduction.  This now must be the same for 2020 and for the life of this existing refi based loan?  Thanks.   

[ReneeM7122]

Unfortunately, the cash that was NOT used for the home is not deductible.  No matter when the indebtedness was incurred, you can not deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home.

https://www.irs.gov/publications/p936 

Closing costs for the refinance

Unfortunately, the closing costs for the refinance cannot be claimed.  They are not tax deductible but may increase the cost basis of your home, which can benefit you in the future if you sell your home. 

However, you can deduct the below even if rolled into the loan:

For a new loan or refinance, mortgage interest paid (including origination fee or "points"), real estate taxes, and private mortgage insurance (subject to limits) are deductible.

On a refinance, you may need to amortize an origination fee (if paid) over the life of the loan. TurboTax will walk you through this process.

Enter the above expenses in the following areas:

1.   Mortgage interest paid: Federal Taxes>Deductions &Credits> Your Home, select Mortgage Interest, Refinancing, and Insurance

2.   Points (or Loan Origination Fee): Federal Taxes>Deductions &Credits> Your Home, select Mortgage Interest and Refinancing, and Insurance- (See Did you pay points in 2016 when you took out the loan?) page

3.   Real Estate Taxes: Federal Taxes>Deductions &Credits> Your Home>Property Taxes

4.   Mortgage Insurance: Federal Taxes>Deductions &Credits> Your Home> Mortgage Interest, Refinancing, and Insurance

[bq5]

so for clarity; box 1 mortgage interest of 1098 form can not be deductible ever based on current rules given that cash out was used for non-home related debts.  Box 3 dated 9/26/2019.

[ReneeM7122]

Yes, as long as the cash-out is not used for the home, the interest isn't deductible.  One way to understand the IRS rationale behind it is that they expect the value of your home to increase when it is improved.  That means that when the house is eventually sold in the future, the IRS will receive more tax from the sale.  Because of this, they let you deduct the interest now as an incentive to go ahead and improve the home, since they anticipate receiving more down the road.  If you use the refinance cash for something other than the improvement of the home, that money is no longer going to generate tax revenue for the government, so they won't allow you to deduct it.