Tax deduction and cash out mortgage refinance

[TURB001]

Hello,

I purchased my primary home back in 2009 taking roughly around $515K loan under FHA program and subsequently I refinanced a few years later to get rid of PMI as the home value went up. I did one more refinance to reduce the rate and in 2016 when my principle was around $430K, I did a cash out refinance. After cashout refinance the new loan amount was around $625K. My intention was to purchase second home with the money I cashed out. However, that plan did not work out and the money stayed in the bank until end of 2019 when I was finally able to purchase second property.

Although my intent was to purchase second property back in 2016 it didn't happen but it happened eventually in 2019 what would be the tax repercussions of this, if there are any? Is there something I need to do? if yes, what and how?

Thank you.

[NCperson]

only the interest related to the $430,000 is tax deductible as it is 'acquisition debt'.  The interest related to the remaining $195,000 is not tax deductible (assuming none of it was used to significantly improve your current home).  So $430/ $625 or 68.8% is deductible; the rest is not,   As you pay down the principle, the percentage will go up as the numerator ($430) will stay the same while the denominator (the $625) will continue to go down.

Even if you were to now buy a 2nd home with the $195,000 it still would not be tax deductible as the law requires the loan to attached to the same residence. You'd violate that rule.  Rather, if you bought a 2nd home and borrowed $195,000 against that home and then turned around and used the $195,000 in the bank to pay down the loan against your primary house, you'd be back in compliance with the rule. 

[steved77]

I did a cash out refinance in December 2017, taking out $97K with a new mortgage balance of $460K.  I'm going to use the formula to figure out the interest deduction.  I did use the funds to purchase a second home in February 2018.