Cash Out Refi

[jdgoods13]

In 2019, I bought a house for $380k with a first mortgage of $300k (80% LTV / 20% down).  I then invested $250k to renovate the house.  It reappraised for $500k after the renovations so in 2020, I refinanced at 75% LTV for a new mortgage of $375k.  After closing costs and paying off original $300k mortgage, I walked away with $60k cash.  I did not need the $60k for improvements cause I already spent $250k so does the fact the $60k "cash out" money had already been spent (within the $250k) mean I cannot deduct 100% of my 2021 mortgage interest? Turbo tax is not calculating any deduction from the $12k in interest I paid in 2021.  

[DianeW777]

You can choose to enter the correct amount of mortgage interest yourself to move through this experience.  Your information is appreciated and it will be reviewed.  To help you move forward with your return please review the information below.

Use the worksheet in the publication to calculate your allowed amount and keep it in your file.  Start with line 7, then complete Part II.  

1. Enter the average balance of all your home acquisition debt incurred after December 15, 2017 (do not include the amount of 'cash out' in this figure).
2. Finish Part I.
3. Enter the total of the average balances of all mortgages from lines 1, 2, and 7 on all qualified homes
4. Continue to finish Part II - enter the result as the amount of mortgage interest (not the 12,000).
5. Select 'I'll enter it myself'

The worksheet If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that isn't more than the cost of the home plus substantial improvements qualifies as home acquisition debt. This means that if the 'cash out' proceeds were not used to improve the home they would not be part of home acquisition debt.

Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt. You can choose to make the entries yourself.

• To review the information and worksheets you can use this link: IRS Publication 936, page 12.
• See the example below.
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[Mike9241]

appraisals are meaningless.

your maximum mortgage balance for determining the interest deduction would be based on the balance of the original mortgage on the date of the refi + the cost of improvements.

[jdgoods13]

Thanks for the response.  So by that logic I can deduct the interest from the full current mortgage balance since $300k (original mortgage) + $250k (cost of improvements) is greater then $375k (current mortgage)?  And the timing of when I spent the $250k on improvements is irrelevant?  

[AmyC]

Yes, that is correct. What you have put into the house is greater than the balance. All of the interest is deductible.