@kljacks10 wrote:
The cash we received as part of our cash-out refinance will be used to build a detached garage, which will add value to the property. Since we didn't do the refinance until later in the year and my husband was hesitant to get the garage building process started until after the refinance was completed, we were not able to use the cash out funds we received in the year of the refinance. If we use those funds to help build the garage this year, I would expect to be able to deduct the full interest amount starting in 2021, is that correct?
Interest is deductible on acquisition debt. Acquisition debt is debt used to buy, build or substantially improve your property.
The loan does not become qualified acquisition debt until you actually pay for the improvement. Suppose the following facts:
- You refinanced the home in December and your first payment is February.
- You refinanced for $120,000
- Your old loan balance was $100,000, and your old loan was 100% acquisition debt.
- You plan to build the garage in the spring when the weather improves.
As of now, your loan is only 83.3% acquisition debt, so you can only deduct 83.3% of the interest for February, March and so on. If the garage is finished by June 1 (for example) and costs $20,000 or more, you can add the debt to your acquisition debt at that time, and your mortgage payments for the rest of the year would be 100% deductible.
There is an averaging method you can use, where you would average the beginning and ending acquisition debt (83.3% and 100% averages to 91.7%) and use that figure for the entire year. Depending on when the garage is completed and the size of the mortgage, the month to month method or the average method might get you a slightly better deduction, you can use the method that gives you the best deduction.
You may need to track this yourself, I suspect Turbotax will not be sophisticated enough to handle the calculation next tax season.
