May I include closing costs into the amount I paid to buy the house in cash-out refinance?

[elevasil]

I refinanced my house last year due to divorce to get my spouse off the mortgage (he signed quit claim deed as well). The outstanding balance of the original mortgage was a bit lower than the new total. Most of the difference was used to pay for refinance fees, but lender did send me a small refund, which means it was a cash-out refinance.
Now I'm having trouble figuring out how to answer the question about how I've used the loan.

- Since you first took out the loan, how much has been spent to buy, improve or build the home it's secured by
Will it be the remaining principle of the original loan? May I include closing costs as well?

- What was the original amount of the loan?
Is it the original principal of the new (after refinance) loan?

- What was the loan balance on January 1, 2020?
Is it the principal of the new (after refinance) loan on Jan 1st?

[DianeC958]

No generally closing costs are not tax deductible.

Since it is a refinanced loan the original amount of the refinanced loan.

The loan balance of the refinanced loan as of 01/01/20

Link to more information about Mortgage Refinance Tax Deductions.

[Opus 17]

Closing costs are generally includeable in qualified acquisition costs for purposes of determining mortgage interest deductibility.

Your situation is somewhat more complicated because you were buying out your spouse’s share of equity.  If the original mortgage that you refinanced only included acquisition debt, and the only thing you used the cash out for was to buy your spouse’s share of the home, then the new loan is all deductible acquisition debt as well.  However, if the original mortgage that you refinanced also contained equity debt, then that part of the debt is not qualified for the interest deduction even though you had to pay off your spouse.

On any mortgage or refinance, closing costs can be included in the acquisition debt as long as they are ordinary and reasonable for your part of the country and do not represent hidden cash out amounts.  For example, I recently answer the question for a homeowner who borrowed the money for their escrow deposit as part of their refinance. Since the escrow deposit will be used to pay property taxes and insurance in the future, and the money in the escrow account is technically the property of the homeowner until the bills are paid, this would be considered cash out equity debt, and the borrowrr’s loan balance ended up being two or 3% equity debt and 97% acquisition debt. That would mean that technically only 97% of the interest is deductible, if he was audited.