Interest Tracing - Mortgage Refi Early for Improvement

Technical topics regarding tax preparation.
#1
MWEA  
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This seems like an easy question, but after searching out the answer, I'm more confused than when I started. Client plans to make "substantial improvements" to her home in the spring. Rates are low, she decides to to do the refinance now and places the cash out portion earmarked for future improvements into a savings account. My understanding is the interest prior to construction of the improvements would be investment interest. Once used for improvements (on the same primary residence refinanced), can this be treated as deductible mortgage interest on Schedule A?

Does the 90 day rule apply in this circumstance? If the funds remain segregated and can clearly be shown in the spring for those improvements, does that work?
 

#2
Nilodop  
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The way I read it, the rule is that, for an improvement (as distinct from a purchase) the debt may be treated as being incurred for the improvement if it is incurred no more than 24 months before the improvement is complete and no later than 90 days after the improvement is complete. That's in Notice 88-74.

But all the law says is that the debt has to be incurred for improvements reasonably expected to be made with the proceeds of the debt. But that's for purposes of including the improvement financed by the debt in fair market value of the property, where fmv is relevant.

So can that general statement (no specific time - or did I miss it?)) be extrapolated to go beyond the 90 days in the Notice? Stated differently, is the Notice just a safe harbor? I haven't researched that.
 

#3
MWEA  
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Nilodop wrote:The way I read it, the rule is that, for an improvement (as distinct from a purchase) the debt may be treated as being incurred for the improvement if it is incurred no more than 24 months before the improvement is complete and no later than 90 days after the improvement is complete. That's in Notice 88-74.

But all the law says is that the debt has to be incurred for improvements reasonably expected to be made with the proceeds of the debt. But that's for purposes of including the improvement financed by the debt in fair market value of the property, where fmv is relevant.

So can that general statement (no specific time - or did I miss it?)) be extrapolated to go beyond the 90 days in the Notice? Stated differently, is the Notice just a safe harbor? I haven't researched that.


Thanks Nilodop for taking the time to respond, that's helpful and gave me a fresh perspective to go back into it this morning. I was interpreting that the 24 month period related only to improvement expenditures incurred prior to the loan disbursement. In this case, the improvements are after the loan disbursement. Answer Connect has a line stating "debt incurred prior to commencing construction or improvement of a qualified residence must be traced to the use." That's what made me question if the 24 month rule was applicable in this circumstance.
 

#4
BTJig  
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Qualified mortgage interest, attributable to the excess mortgage increase due to refinancing is not deductible for AMT purposes unless it is used for improvements, which it looks like your client is doing. If they never get to those improvements and just sit on the money (or spend it on the grandkids), it is an adjustment for AMT purposes.
 


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