Question

Consolidated HELOC & 1st Mortgage with cash out. How do I calculate how much interest to deduct?

Forum|Forum|5 years ago
March 11, 2021
1 reply
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I opened a HELOC account in 2019 and had drawn $35,000 to make substantial improvements to my home in 2019. In 2020, I refinanced my 1st mortgage consolidating it with the HELOC balance and cashed out during this process. I am trying to figure out how much interest to deduct using TurboTax.

In the FEDERAL TAXES/Deductions & Credits/Let's see how much interest you can deduct this year tab, I clicked on 'Help me figure this out' option.

The first question reads 'Since you first took out this loan, how much has been spent to buy, improve, or build the home it's secured by?'. I have few question on this part:

Is "this loan" mentioned here the refinanced loan or the original 1st mortgage?

Is this a place where I can enter 2019 HELOC loan spent on the home improvement?

If so, do I enter entire money spent on home improvement ($35,000) or only the balance that was consolidated during the refinancing?

The second question reads 'What was the balance of our mortgage loan on December 31, 2020?' I am assuming this is the refinanced (consolidated) loan amount as of 12/31/20. Or is it the balance after subtracting cash out amount?

Please advise.

ReneeM7122

Is "this loan" mentioned here the refinanced loan or the original 1st mortgage?

It's the refinanced loan

Is this a place where I can enter 2019 HELOC loan spent on the home improvement?

Yes

If so, do I enter entire money spent on home improvement ($35,000) or only the balance that was consolidated during the refinancing?

$35,000, the entire amount spent on home improvement

The second question reads 'What was the balance of our mortgage loan on December 31, 2020?' I am assuming this is the refinanced (consolidated) loan amount as of 12/31/20. Or is it the balance after subtracting cash out amount?

It is the balance on 12/31/2020.

Here is a TurboTax article about deducting mortgage and interest.

I

informationojeleeAuthor

Thanks for the prompt response.

I hope I understood the second question correctly...For example, if the 1st mortgage was $200K and HELOC was $35K and cash out was $25K. Instead of entering $260K (total balance of the refinanced mortgage), I should enter $235 ($260 (total) -$25 (cash out)), correct?

C

Cynthiad66

Yes.

n exchange for this leniency, there are a few rules on what you can and cannot deduct when you take a cash-out refinance. Though you can use the money for nearly anything, you’ll need to use it for a capital home improvement in order to deduct your interest. IRS Publication 936 covers this in a little more detail. As a general rule, you need to make some kind of improvement to your home that increases the property’s value to deduct your interest. You usually can’t deduct the interest if you use the money for anything else, like paying off credit card debt or taking your dream vacation.

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