Question

Cash Out Refinance

Forum|Forum|5 years ago
February 26, 2021
2 replies
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I took a cash-out refinance in 2020 and used part of the cash out for home improvement (new doors). Because the loan processing took longer than originally scheduled I needed to borrow the money to pay for the doors and then pay the person back when the refinance came through later.

Would I still be able to deduct the interest on the portion used for home improvement under these circumstances?

C

Cynthiad66

Yes. However, remember that on the portion of the Cash Out used to substantially improve your home. So you will need to calculate the amount that is strictly related to buying, building or substantially improving your home. The interest on any portion that was used for any other reason is not tax deductible.

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O

Opus 17

Employee

You can deduct interest on acquisition debt. Acquisition debt is debt that was incurred to buy, build, or substantially improve your home.

So one issue is, are new doors a "substantial improvement." Here is the IRS instruction.

Substantial improvement.

An improvement is substantial if it:

Adds to the value of your home,
Prolongs your home's useful life, or
Adapts your home to new uses.

Repairs that maintain your home in good condition, such as repainting your home, aren't substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.

The second issue is timing. Generally speaking, you can count expenses you paid before the loan came through if the loan is "made" (approved and paid out) within 90 days after the completion of the work. If the loan was applied for before the end of 90 days but not approved until after the 90 days, it will usually be acceptable if audited.

F

FerdousR

What's the time limit by which I would have to use the cash amount in qualified home improvement? Say I receive 100K from cash out refinance on July 1, 2020. Within how many days do I have to use up 100K for qualified home improvement?