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Level 3

# Cash Out Refinance

After entering the 1098 mortgage interest information, TurboTax asks about the history of this loan.  My current loan is a refinance (one of several over a 30+ year period).  I am unclear how to answer the next question: "Have you ever pulled cash out from this loan when you refinanced it?".  Does "this loan" refer only to the current loan or over the entire history of loans (original purchase and all refinances).  In my case, I had a cash out in one refinance in 2003.  When I enter "Yes," I end up paying more taxes, so it's important to answer this correctly.

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Level 3

## Cash Out Refinance

Yes, it refers to the entire history of the loan.  So you will need to calculate the amount that is strictly related to buying, building or substantially improving your home.  The interest on any portion that was used for any other reason is not tax deductible.

Example of how to calculate this number is below.

If you refinanced your home in 2003, with a balance on your mortgage of \$225,000 and took out \$75,000 to pay off debt. Your new balance was \$300,000. The \$225,000 is your original home purchase amount,  the \$75,000 is not so that interest is not deductible. Your original home purchase price is now 75% of the mortgage balance.

If you refinance again a month later before making any payments (for easy math sake) and take out \$400,000, of which you use \$100,000 to buy a boat, you would only count 56% of the balance as your original home loan balance. (225,000/400,000=.5625) So with no other refinancing, your current loan balance is \$300,000, you would only be able to deduct interest on 56.25% of the balance or \$168,700 (300,000x .5625)

Now, if you used the \$100,000 to build an addition onto your house instead of buying a boat with it, this would be counted as substantially improving your home, therefore the amount that would now have deductible interest would be 81.25% ((225,000+100,0000/400,000=.8125) In this situation, you would be able to deduct the interest on 81.25% of your current balance if there was no further financing.

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8 Replies
Level 3

## Cash Out Refinance

Yes, it refers to the entire history of the loan.  So you will need to calculate the amount that is strictly related to buying, building or substantially improving your home.  The interest on any portion that was used for any other reason is not tax deductible.

Example of how to calculate this number is below.

If you refinanced your home in 2003, with a balance on your mortgage of \$225,000 and took out \$75,000 to pay off debt. Your new balance was \$300,000. The \$225,000 is your original home purchase amount,  the \$75,000 is not so that interest is not deductible. Your original home purchase price is now 75% of the mortgage balance.

If you refinance again a month later before making any payments (for easy math sake) and take out \$400,000, of which you use \$100,000 to buy a boat, you would only count 56% of the balance as your original home loan balance. (225,000/400,000=.5625) So with no other refinancing, your current loan balance is \$300,000, you would only be able to deduct interest on 56.25% of the balance or \$168,700 (300,000x .5625)

Now, if you used the \$100,000 to build an addition onto your house instead of buying a boat with it, this would be counted as substantially improving your home, therefore the amount that would now have deductible interest would be 81.25% ((225,000+100,0000/400,000=.8125) In this situation, you would be able to deduct the interest on 81.25% of your current balance if there was no further financing.

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Level 3

## Cash Out Refinance

This is VERY helpful.  The key is any new loan must substantially improve the home purchased by the original loan.  If I understand correctly, a refinance with a cash out to buy land for a second home and later a second mortgage to build that second home do NOT meet the requirement because these funds are not improving the home that is the collateral for the original loan.  Hence the interest on these is NOT deductible.  I would think the same applies to a refinance where one consolidates a first and second mortgage.  Only the first (original) loan interest would be deductible.  Could you please verify that I am correct in my understanding.  Thank you very much.
New Member

## Cash Out Refinance

What if we refinanced, and took cash out AFTER the tax year that we're preparing the return for. Does that count?

What if that money was put right back into principle?

Employee Tax Expert

## Cash Out Refinance

You will report the transaction in the tax year in which it occurred. Interest related to cash out refinancing is not deductible, even if you later used it to pay down the mortgage. Interest is only deductible if the loan was used to "buy, build or substantially improve" the home that secures the loan.

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New Member

## Cash Out Refinance

I'm dealing with this as well. After I said I did a cash-out refi, it asks "Since you first took out the loan, how much has been spent to buy, improve or build the home it's secured by?"

I did not use the extra cash for the home, but I should still be able to use the original loan amount (like in your example) so a portion of my mortgage interest will be tax deductible.

Do I enter the ending balance on the original loan for this then? As the money spent to buy the home? If I put in \$0 it doesn't calculate the portion that is tax deductible... and say I don't qualify for any deductions (does not show up on my itemized deduction at all even though I paid over \$20k in interests).

Expert Alumni

## Cash Out Refinance

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

See this TurboTax Help.

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New Member

## Cash Out Refinance

That doesn't solve my problem since it's a cash out refinance. Please check my original message again.

Employee Tax Expert

## Cash Out Refinance

@ oliu612 Yes, you can still deduct Mortgage Interest for the amount of the Original Loan you Refinanced with Cash Out.

If you have a Refi loan for 50K, for example, and paid off the original loan balance of 45K, and took 5K out for other stuff, enter it just that way.

Indicate you have a 50K loan, which 5K was cash out, so 45K was used to 'buy, build or improve' the home.