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Maximizing refinancing tax deductions
Dear Tax Talk:
My current mortgage is $205,000. My home was appraised at $500,000.
I want to refinance for $365,000 and use $60,000 for remodeling
my house and $100,000 to purchase a rental property.
Will I be able to deduct the entire amount of my refinance
or just the $100,000 on top of my original acquisition? Is there
any condition (i.e., selective placement of borrowed monies) that
would allow me to deduct the entire amount of my refinance?
Daniel
Dear Daniel:
An individual is allowed to deduct interest on a mortgage loan used
to acquire the taxpayer's home. An individual can refinance that
mortgage and borrow out money to substantially improve the home
and continue to deduct the interest on the refinanced amount plus
the cost of the improvements. And an individual can borrow out up
to $100,000 additionally and use it for any purpose (other than
buying tax-free bonds) and deduct the interest on the home mortgage.
However, in your case, you'll be borrowing the additional
money to make an investment in rental property. That means the additional
borrowing won't be considered home equity indebtedness.
Instead, the $100,000 will be traced to and deducted
as interest relating to the rental property. The rental property
activity is reported on Schedule E as an adjustment to income rather
than an itemized deduction. This is more beneficial tax wise as
it lowers your adjusted gross income, which can affect your ability
to qualify for certain tax breaks.
-- Posted: March 27, 2002
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