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Deducting interest from HELOCs

Technical topics regarding tax preparation.
#1
ode923  
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The rule on HELOCs, as of 2018, is they are no longer deductible unless used to buy or improve a home or second home.

Some clients take out a HELOC as part of a maneuver to refinance their original loan.

Here's an example:

2015: Taxpayer takes out $800K mortgage loan to purchase house.

2018: Taxpayer takes out $50K HELOC which they use to refinance their original mortgage loan.

Is the interest on the HELOC still deductible in 2018?
 

#2
Erin_EA  
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Good question. I haven't come across this in practice. And it doesn't seem to be addressed anywhere in Publication 936. I would guess the IRS would say no, they may not deduct the HELOC interest, because that debt was NOT incurred to "buy, build, or substantially improve the home" - the debt was incurred to improve the taxpayer's financial position?
 

#3
EZTAX  
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ode - I am not understanding your numbers. Did the Heloc reduce the original mortgage amount? If so, then it would be considered deductible mortgage interest.
 

#4
Chay  
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Does the definition of "refinance" here...
https://www.law.cornell.edu/cfr/text/26/1.163-10T#m_3

...also apply to the term "refinance" here?
https://www.law.cornell.edu/uscode/text/26/163#h_3_A
 

#5
Frankly  
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ode923 wrote:2018: Taxpayer takes out $50K HELOC which they use to refinance their original mortgage loan.

What did he do with the $50k? Closing costs?
 

#6
ode923  
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Thanks for the responses so far. I've asked the client for more details.

When I saw the 1098 for the HELOC I asked what she used it for. She said "to refinance the mortgage." What could that mean? I've asked for clarification, but my assumption is that it was used to pay down the mortgage principal as part of this refinancing package/maneuver.
 

#7
JR1  
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Sounds deductible to me.
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#8
makbo  
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Erin_EA wrote: I would guess the IRS would say no, they may not deduct the HELOC interest, because that debt was NOT incurred to "buy, build, or substantially improve the home" - the debt was incurred to improve the taxpayer's financial position?

A re-finance of acquisition debt remains acquisition debt, up to the amount of the refinanced principal, and for as long as the term of the original loan (i.e. you can't extend the term of acquisition debt by refinancing beyond the original scheduled payoff date). There have been other discussions about what property must secure the re-financed debt and so on, but let's omit those for simplicity.

What's not clear from the OP is what was the acquisition debt balance at time of re-finance, and if it was more than $50K (seems very likely), what other loans were originated as part of the re-finance? I don't think the questions can be answered without that additional information, despite JR1's casual response.
 

#9
makbo  
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Chay wrote:Does the definition of "refinance" here...
https://www.law.cornell.edu/cfr/text/26/1.163-10T#m_3

...also apply to the term "refinance" here?
https://www.law.cornell.edu/uscode/text/26/163#h_3_A

In your first link, it's all about refinancing grandfathered debt (the kind actually named that way in the code, not the temporary change in debt limits under TCJA). From circa 1986, which as of now, more than 30 years later, I don't think exists any more?

The last time I dug into the TCJA code changes, I came away with the impression that the "refinance of grandfathered debt" rules from 1986 were also applied to debt incurred before the Dec 2017 cut-off for TCJA, for purposes of applying the new temporary $750K limit for acquisition debt.

Is the gist of the OP question actually about whether the 2018 transaction triggers the new $750K limit for this taxpayer, even thought they had a loan with a larger balance that was incurred before TCJA?
 

#10
Chay  
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makbo wrote:In your first link, it's all about refinancing grandfathered debt (the kind actually named that way in the code, not the temporary change in debt limits under TCJA). From circa 1986, which as of now, more than 30 years later, I don't think exists any more?

Right, I don't think that particular regulation has any application anymore. The only reason I linked to it was I couldn't find the term "refinance" defined anywhere else, and I believe the OP's question turns on the meaning of that term.

makbo wrote:Is the gist of the OP question actually about whether the 2018 transaction triggers the new $750K limit for this taxpayer, even thought they had a loan with a larger balance that was incurred before TCJA?

That's definitely at least a part of it. So, for completeness, let's also take note of the use of the term "refinance" here:
https://www.law.cornell.edu/uscode/text ... #h_3_F_iii

Can we tie the meaning of this word in section 163 universally to that old definition from the Regs?
 

#11
jon  
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Why would they be a refi of original loan with a "helco" to cover closing costs? Are they going from one loan to two? Loan balance should be on the 1098. Obviously it is possible on the hopes of paying the HELCO off faster at a lower interest rate? If mortgage refied is $50,000 lower than before you may have a chance.?!
 

#12
makbo  
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jon wrote: Loan balance should be on the 1098.

Isn't that the beginning of year loan balance, which would be zero for any new loan?
 

#13
jon  
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I thought it was the ending
 

#14
makbo  
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jon wrote:I thought it was the ending

No, it's the beginning. I was pretty sure of the answer, but was too lazy to open the form and take a look. I guess you were too! :lol:
 

#15
Nilodop  
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Isn't that the beginning of year loan balance, which would be zero for any new loan?

Box 2. Outstanding Mortgage Principal
Enter the amount of outstanding principal on the mortgage as of January 1, 2019. If you originated the mortgage in 2019, enter the mortgage principal as of the date of origination. If you acquired the mortgage in 2019, enter the outstanding mortgage principal as of the date of acquisition.
 

#16
makbo  
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No fair jumping ahead. The 2018 version of the form does not have that language. :o I actually looked at both versions before I posted, but since the question was about 2018, I went with that one.

But at least we both seem to agree: it is definitely not the end of year balance, which was the question at hand.
 

#17
Nilodop  
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Isn't that the beginning of year loan balance, which would be zero for any new loan?. OK, so in 2018 it's not zero, it's blank.
Box 2. Outstanding Mortgage Principal as of
1/1/2018
Enter the amount of outstanding principal on the mortgage as of January 1, 2018. If the mortgage originated during 2018 or you acquired the mortgage during 2018, leave this box blank.
 

#18
makbo  
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I have been quoting from the instructions that are included with the Form 1098 ("Instructions for Payer/Borrower"). Nilodop apparently has been quoting from the instructions that are in a separate document for the same form ("Instructions for Form 1098"). Fortunately, it is pretty uncommon for the IRS to publish duplicate instructions in both places (or in this case, almost-but-not-quite-duplicate instructions).
 

#19
Nilodop  
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The ones I quoted from is for the preparer of the form.
Who Must File
File this form if you are engaged in a trade or business and, in the course of such trade or business, you receive from an individual $600 or more of mortgage interest (or $600 or more of MIP, if section 163(h)(3)(E) applies for 2019) on any one mortgage during the calendar year.
 


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