Cash Out Refinance Points Deduction

[cheetah2114]

My understanding is that if I do a cash-out refinance and use the cash on improvements on my main home then I can:

Deduct all interest paid on the new loan.

Deduct points paid but only over the lifetime of the loan.

I enter the two 1098s into turbotax (one for paid off load and one for refinance) and it appears turbotax is deducting all the refinance points in 2020. I've tried answering the questions different ways and yet get same results. How am i suppose to enter this (or answer questions) or am i incorrect and the refinance point CAN be deducted in entirety in year 1.

Thank you.

[Cynthiad66]

Yes you are correct.  

Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid. You can deduct the points in full in the year you pay them, if you meet all the following requirements:

1. Your main home secures your loan (your main home is the one you live in most of the time).

Discount points are fully deductible, no matter which type of property you're refinancing. You can also deduct discount points on both regular and cash-out refinances.

[Mike9241]

only Congress could come up with this tax rule.  the portion for home improvements is immediately deductible only the points on the portion refinanced are subject to amortization.   (IRS PUB 936). as some previous threads TT home interest deduction calculations are not working at this time.

[cheetah2114]

Reading IRS 936 I really don't have confidence in using turbotax this year. I have doubts Turbotax isn deducting the points right for a cash out refinance.

[dutch688]

Still on points. Can I deduct all points in the year I refinanced, even though I took no cash out?? I try to amortize but Turbo Tax adds the points to total interest on Schedule A. I would prefer to take all in one year.

[dutch688]

I am glad I'm not the only one having issues.

[Cynthiad66]

Yes,  you can deduct points for your main home, if all of the following conditions apply:

• They're discount points (see the definition)
• The mortgage is used to buy, build, or improve the home, and the home is the collateral for the loan
• Paying mortgage points is a customary practice in your area and the points you paid aren't excessive for your neighborhood
• The points were paid directly to the lender, either by you or the seller (no borrowing)
• Your down payment, plus any points the seller paid, exceed the points paid amount
• You use the cash method of accounting (almost all taxpayers do)
• The points are calculated as a percentage of the mortgage principal (not required on home-improvement loans)
• The points are clearly itemized on your settlement statement as points (not required on home-improvement loans)

On a second home, points can only be deducted over the life of the loan. The same is true for refinances, except in cases where you used a portion of your refinance proceeds to improve your home. In that case, the points related to the home-improvement portion of the loan can be deducted in the year you paid them.

If you refinanced with the same lender, any undeducted points left over from the first mortgage will be deducted over the life of your new loan. But if you refinanced with a new lender, any leftover undeducted points can be deducted in the year of the refinance.

When you get to the Did you have any home loans? screen in the Deductions Credits section, we'll walk you step-by-step through your mortgage, including points and refinances.

If you meet all the above criteria, you can either deduct all your points in the year you paid them or deduct them in equal increments over the life of the loan. Either way, you'll need to itemize to get the deduction.

The deduction for mortgage interest is capped at $750,000 of debt. Interest on up to $1 million of acquisition debt for loans prior to December 15, 2017 is grandfathered.

[edited 2/9/21 | 10:03 pst]

[cheetah2114]

Reading IRS 936 I don't trust turbotax. I reads like only the points for the portion of the loan used for home improvements can be deducted that year and the rest must be over lifetime of loan.

So if I had 100k loan.

I refinanced to a 150k 30 year loan paying $1.5k in points. I used the 50k cash out on home improvements.

IRS 936 makes it sound like I can deduct the improvement portion 50k/150k * $1.5k ($500) in full in 2020, but the other 1k must be amortized over the life of loan. 1k/30 = $33.

No matter how I answer it appears turbotax either deducts the full $1.5k or $1.5/30=$50.

Is there a help line to call or is my only choice paying for live help or going to H&R block?

[Opus 17]

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@dutch688 wrote:

Still on points. Can I deduct all points in the year I refinanced, even though I took no cash out?? I try to amortize but Turbo Tax adds the points to total interest on Schedule A. I would prefer to take all in one year.

---

On a refinance, you can only amortize your points over the life of the loan.  If you used part of the refinance to improve your home, then part of the points are deductible this year and the rest must be amortized.

[Opus 17]

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@cheetah2114 wrote:

Reading IRS 936 I don't trust turbotax. I reads like only the points for the portion of the loan used for home improvements can be deducted that year and the rest must be over lifetime of loan.

So if I had 100k loan.

I refinanced to a 150k 30 year loan paying $1.5k in points. I used the 50k cash out on home improvements.

IRS 936 makes it sound like I can deduct the improvement portion 50k/150k * $1.5k ($500) in full in 2020, but the other 1k must be amortized over the life of loan. 1k/30 = $33.

No matter how I answer it appears turbotax either deducts the full $1.5k or $1.5/30=$50.

Is there a help line to call or is my only choice paying for live help or going to H&R block?

---

You are correct that your points deduction is limited in the way you calculate.  I generally only answer tax questions, I don't try to explain how or why the program works or doesn't work.  The simplest solution in your case is probably to just list the $500 in points this year (that you know are deductible due to the improvement), and then list the remainder next year for amortization.

I can send this discussion to a moderator for a possible program enhancement or bug fix, but I suspect it will not be implemented until late this season, if at all, due to the pressures of all the other changes that still need to be made.

[GabiU]

@cheetah2114 I'd like to get a glimpse of what you're talking about. Can you please provide me with screenshots of where you are in the program and also a token number? 

If you're in TT Desktop: 
1. Click into your return. ​
2. Click Online and select "Send Tax File to Agent". ​
3. This will generate a message that a diagnostic copy will be created. Click on OK, the tax file gets sanitized and transmitted to us.​
4. Please provide the Token Number that was generated onto a response. 

If you're in TT Online: 

1. Sign into your online account.​
2. Locate the Tax Tools on the left hand side of the screen. ​
3. A Drop down will appear. Click on Share my file with agent.​
5. This will generate a message that a diagnostic copy will be created. Click on OK, the tax file gets sanitized and transmitted to us.​
6. Please provide the Token Number that was generated onto a response. ​

Thank you! I hope to hear from you soon. 

GabiU