We refinanced the mortgage on our vac home so that we could purchase the lot next door to it. Is the interest on the amt used to purchase the lot not tax deductible?

[hoodie813]

Ex original mortgage balance was $135,000 additional $100,000 added to mortgage at refinance to purchase lot next door. Is only the interest on the $135,000 tax deductible?

[RaifH · Accepted solution]

No, the interest on any cash you took out of your second home in a refinance to purchase the adjacent lot would not be tax-deductible. 

Unless the money is used to buy, build, or substantially improve the home it is not considered acquisition debt and therefore not deductible. For full details on this subject, please see IRS Publication 936. 

In order to correctly enter the mortgage interest in TurboTax, please follow these steps:

1. With your return open, search for 1098 and select the Jump to link in the search results

2. Follow the instructions to enter your 1098 information

3. For the refinanced loan, under Let’s get some details about this loan, answer No to Is this the original loan you used to buy your property?

4. Answer Yes to Is this loan a home equity line of credit or a refinance of a previous loan

5. Answer Yes to Did you take cash out when you got this loan? 

6. Answer No to Have you used the money from this loan exclusively on this home?

[Carl]

@RaifH Take a look at pub 936 page 9 top of 3rd column, 2nd paragraph

The cost of building or substantially improv-
ing a qualified home includes the costs to ac-
quire real property and building materials, fees
for architects and design plans, and required
building permits.

Since the property is adjacent to the main home, would this not qualify as acquisition debt secured by the main home since the property becomes "a part of" the main home and the property the main home is built on? Or is this a grey area open for interpretation?

[Carl]

Forgot link I used to pub 936

https://www.irs.gov/pub/irs-pdf/p936.pdf

[Mike9241]

additional amounts borrowed to make substantial improvements to your main or second home increase acquisition debt. the debt must be used to buy, build or substantially improve the taxpayer's home that secures the loan

 IR-2018-32

it is not clear that buying next door land would be deemed a substantial improvement.

[Carl]

it is not clear that buying next door land would be deemed a substantial improvement.

Precisely my point. "It's not clear".  Maybe some day this scenario will end up in tax court.

[hoodie813]

Thank you for your responses.  I appreciate it!