peggysioux5 Posted March 10, 2021 Report Share Posted March 10, 2021 Taxpayer refi'd primary home and used proceeds for down payment of second home. Is all interest that applies to aquisition debt of both homes deductible on refi? I recall a webinar a few years back that stated the home had to be used for collateral on loan in order for the interest to be deductible. If that is the case, the second home was not used as collateral so therefore not deductible, correct? I have had other tax preparers tell me that the interest on refi that pertains to second home would be deductible. Peggy Sioux Quote Link to comment Share on other sites More sharing options...
Pacun Posted March 10, 2021 Report Share Posted March 10, 2021 On Sch A, enter the interest paid on the main loan on the first home and the interest paid on the second home provided it costs less than $750K. No interest from the refi. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 10, 2021 Report Share Posted March 10, 2021 11 hours ago, peggysioux5 said: Taxpayer refi'd primary home and used proceeds for down payment of second home. Is all interest that applies to aquisition debt of both homes deductible on refi? I recall a webinar a few years back that stated the home had to be used for collateral on loan in order for the interest to be deductible. If that is the case, the second home was not used as collateral so therefore not deductible, correct? I have had other tax preparers tell me that the interest on refi that pertains to second home would be deductible. Peggy Sioux I think it's deductible, with some of it subject to home equity indebtedness limits. Consider the following: It can't all be "acquisition indebtedness" because that does require that the loan be used to "buy, build, improve" the qualified residence securing the loan, Sec 163(h)(3)(B)(i)(II) however, It would fall under the definition of "home equity indebtedness" though, subject to those rules and limitations, because it was used to buy, build, improve a qualified residence of the taxpayer. Sec 163(h)(3)(C). Qualified residence is defined in 163(h)(4) and includes the principal residence and one other selected by the taxpayer for the year. I think it works like this: If there was an existing mortgage on the principal residence that was refinanced, the amount of the new loan up to that amount would be considered as grandfathered in as acquisition indebtedness, and then only the excess above that that was used for the second home would be considered home equity indebtedness. 163(h)(3)(F)(i)(III) and 163(h)(3)(F)(iii)(I) https://www.law.cornell.edu/uscode/text/26/163 Hope I got all the code references right! 2 Quote Link to comment Share on other sites More sharing options...
peggysioux5 Posted March 10, 2021 Author Report Share Posted March 10, 2021 Another tax preparer forwarded to me this example from IRS this morning: Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible. Based on the example, I would think the refi interest that pertains to the second home would not be deductible. I read the tax codes that you provided, but am still leaning toward non deductible, but with such varying opinions of other tax preparers, I wanted to make sure I was not missing anything. Peggy Sioux Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 10, 2021 Report Share Posted March 10, 2021 Was it a new loan or a refi with cash out? If a refi, what was the date of the original mortgage? Quote Link to comment Share on other sites More sharing options...
Pacun Posted March 10, 2021 Report Share Posted March 10, 2021 TCJA changed the refi regulations. It might be useful if you gave us the cost of each house and the dates. If the first house costs a million dollars, then you are limited by the first loan of a million dollars and you cannot take any mortgage interest paid to the second house. if the first house is $750K, then technically you will be limited to that because there will be not room left for the second house. If the first house cost is $400K and the second house cost $700K, then you will use the whole first house (no refi) interest and ONLY half of the interest paid for the second home. Again, I am assuming that the second house was purchased in the last couple of years and the old house was purchased pre-TCJA. Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 10, 2021 Report Share Posted March 10, 2021 Doesn't the second house have to be collateral on the mortgage for the interest to be deductible? Quote Link to comment Share on other sites More sharing options...
Pacun Posted March 10, 2021 Report Share Posted March 10, 2021 No, the refi has to be used on the house that is being used as collateral. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 10, 2021 Report Share Posted March 10, 2021 It should all be deductible. The portion of the refinance up to the amount of the original debt will qualify as home acquisition debt and the second home also because it is a qualified home. Below is a quote from Pub 936 as well. Quote Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt. Next, note above it says "a qualified home" and under the tax law that is defined as a principal residence AND a second home that taxpayer chooses for that tax year. Pub 936 goes on to say this: Quote Mortgage that qualifies later. A mortgage that doesn't qualify as home acquisition debt because it doesn't meet all the requirements may qualify at a later time. For example, a debt that you use to buy your home may not qualify as home acquisition debt because it isn't secured by the home. However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Similarly, a debt that you use to buy property may not qualify because the property isn't a qualified home. However, if the property later becomes a qualified home, the debt may qualify after that time. The second home is a qualified home at the time of the refinance, but I used the above to make the point that taking the deduction is valid. 2 Quote Link to comment Share on other sites More sharing options...
peggysioux5 Posted March 10, 2021 Author Report Share Posted March 10, 2021 Original loan was in 2015 and balance of loan at refi was $220,700. Refi'd in 2020 and took out an additional $100,000 for down payment on second home. Second home purchase price was $300,000 so well below the $750,000. The point that I get stuck on is the IRS stating loan has to be secured by the qualified home in order to be deductible. If second home interest is deemed deductible based on info above, why would the IRS provide the example that I listed above showing second home interest not deductible being loan was not secured by the second home. Also, code shows home equity debit is currently not deductible. I appreciate everyone's input and I would like to include all interest, but just want to be clear in my mind the correct handling. Peggy Sioux Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 10, 2021 Report Share Posted March 10, 2021 19 minutes ago, peggysioux5 said: Also, code shows home equity debit is currently not deductible. Please don't confuse home equity loan, HELOC (those are bank products), or second mortgage with deductibility. If the use of home equity loan or HELOC proceeds qualify as home acquisition indebtedness or home equity indebtedness as defined by the tax code, then the interest would be deductible within the limits allowed. Where home equity or HELOC interest isn't deductible (through 2026) is where the proceeds are used for something other than to buy, build, improve. So, for example, interest on a HELOC used to purchase a new car would NOT be deductible under the current law, but interest on a HELOC used to renovate a kitchen or build an addition would be. 3 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 10, 2021 Report Share Posted March 10, 2021 I would deduct it due to both interest tracing rules and the fact that it is secured by a qualified home. 3 Quote Link to comment Share on other sites More sharing options...
Pacun Posted March 11, 2021 Report Share Posted March 11, 2021 On 3/10/2021 at 2:22 PM, jklcpa said: Please don't confuse home equity loan, HELOC (those are bank products), or second mortgage with deductibility. I agree with jklcpa. HELOC must be used on the same house and I was confused. Now I remember clearly.. the teacher a couple of years ago gave this scenario as an example: You buy a second house for you, refi qualifies for Sch A deduction. You refinance and take out money to help your son to get a house for him and his kids, no Sch A deduction. Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.