I pulled cash from refinanced mortgage loan to pay off a HELOC. May I deduct the full interest this year on the new mortgage loan?

[skaman4]

Can I deduct the new mortgage loan's full interest this year, or do I have to subtract the portion used to pay off the HELOC.

[DavidD66]

If you used  the funds from the HELOC for renovations to your home, that is to "buy, build, or substantially improve" the same property that secures the mortgage you refinanced, then you can deduct 100% of the new mortgage interest (as long as the new mortgage is $750,000 or less).

[Opus 17 · Accepted solution]

You have to trace the balances of your loans. Interest is only deductible on acquisition debt. Acquisition debt is debt that is used to buy, build, or substantially improve your home.

For example, suppose you originally bought the home for $150,000, with $30,000 down and a $120,000 mortgage. $120,000 is your acquisition debt. Then, supposing that a few years later you take out a home equity loan of $30,000 and use it for vacations or debt consolidation or other personal expenses.  Your acquisition debt is still only the balance of the original mortgage.  Then supposing that you refinance the house for $150,000 into a single mortgage. At the time of the refinance, the first mortgage was that was paid off down to $100,000. That is your only acquisition debt, and if the new loan is $150,000, then your mortgage interest is only 66% deductible.

However, if you used the re-finance or the HELOC previously to pay for home improvements that were made up to 90 days before the loan or up to two years after the loan, that can also count as acquisition debt. You might have an original mortgage that is paid down to $100,000 of acquisition debt and part of the HELOC might be acquisition debt and you can add those together and deduct the interest. But it all comes down to tracing the mortgage balances and how the money was spent.