Mortgage interest deduction question (Potential TurboTax Error)

[John Haddock]

When asking for information of a cash out mortgage loan TurboTax asks:

"How much of your loan did you use to build, remodel, or repair the property it's secured by? ___________"

However if you go to the specific line on the smart worksheet it asks:

"Were all loan proceeds used to purchase, build, or improve the home secured by this loan?

If no, amount used to purchase, build, or improve this home is: ____________"

Based on the later, should the software question include the loan payoff amount?

e.g. "How much of your loan did you use to payoff previous loan, build, remodel, or repair the property it's secured by? ___________"

It must be included if you want the correct prorated interest. Unless there is another way to arrive at the correct interest allocation.

[JillS56]

No, it is asking about the proceeds.   Proceeds would be the amount of the cashout you received.   TurboTax knows that the prior loan is being paid off.   The purpose of the question is to find out if you used any of the proceeds for anything other than your home.   The law has changed and you can no longer claim the interest on funds used from a refi to consolidate bills, purchase a car, etc.   The cashout has to be used to improve your home.

[John Haddock]

Thank you. But it would not be the proceeds but the portion of the cashout that is used for home improvements? Part of the cash out is used for home upkeep (eg painting) and future improvements.

Reviewing the worksheet calculation, Turbotax only uses the amount in that line (ie valid proceeds) to prorate the total interest paid during the year.  It does not prorate based on (refinanced loan + valid proceeds) as it should. 

Example: 
Mortgage Amount: 300K

Loan Payoff: 200K

Cashout: 100K.  (40K improvements + 60K maintenance + future improvements)

if you only input the 40K it will only use this portion of 13% (40/300) to prorate the interest (13%*interest paid). It should use 240/300 or 80%. 

[RaifH · Accepted solution]

Yes, you are correct. If you indicate that you took cash out and did not use the entire amount on the home, TurboTax Online phrases the next question as you indicated. TurboTax Desktop asks how much has been spent to buy, improve, or build the home it's secured by?

You do need to include the acquisition cost in that field, as well as any cash that you took out that you did use to substantially improve your home.

[John Haddock]

Thank you. Correct, it s the portion of the previous loan that was used for acquisition or improvements, as previous loans could also include cashouts not  used for home improvements. 

[cjhowland]

What got me confused was the fact that TurboTax neglects to specify "buy" as in pay off the original mortgage which was used 100% to purchase the home. Here is the question as it is in the software "How much of your loan did you use to build, remodel, or repair the property it's secured by?" No mention of buy or payoff so I was terribly confused by this. So, just to be clear, if I refinanced my home for 400k and the payoff was 300k and I used the 100k to pay off debt, buy a vehicle, etc - no home improvements, I would put 300k for an answer?

[cjhowland]

You are absolutely right. The amount that should go in this box is the total loan amount (refinance) minus proceeds not used to BUY or remodel, etc. They neglected to make it clear that the money used to payoff the previous loan is deductible if ALL the original loan was used to purchase the home refinanced. Jeez, why do they make so confusing?