Deductibility of HELOC interest after cash-back refinance

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Deductibility of HELOC interest after cash-back refinance

Postby markcoop » Fri Dec 21, 2012 1:34 pm

This issue came up as a tangent in a thread a few weeks ago, but I didn't get an answer. Here's the scenario:

a) Currently have $130K mortgage.
b) About to do a refi+cash back for $150K (in other words $20k cash-back).
c) Have a $100K HELOC open.
d) Current law allows one to deduct interest on loans up to $100k using the house as collateral (ie, HELOC).

I'm interested in understanding when interest from the HELOC is deductible. Assume the $20K cash-back is not used on the house. I understand that means today, $80K of the HELOC could be deductible (if I were to use it).

Now lets fast forward a few years and assume I didn't use the HELOC till this point. Also assume I paid off $30K of the mortgage. What does that mean as far as the deductibilty of the HELOC.

1) Is $80k still the max I can borrow from the HELOC and deduct the interest?
2) Is 100k the max I can borrow from the HELOC and deduct the interest since I paid back more than the initial $20k cash back?
3) Is $84k the max I can borrow from the HELOC and deduct the interest (paid back 20% of the loan so the prorated amount of the $20k cash-back is $4k)?

This also brings up another question: Is the interest on loans up to $100k you can deduct using the house as collateral get reset every year. ie., I borrow $100K this year in my HELOC. Pay it back over a few years. Can I then borrow another $100k and deduct the interest?

Thanks for any input. Been searching around but haven't found the answers to these questions.
Mark
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Re: Deductibility of HELOC interest after cash-back refinanc

Postby john94549 » Fri Dec 21, 2012 3:23 pm

You might wish to peruse IRS Publication 936.
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Re: Deductibility of HELOC interest after cash-back refinanc

Postby swaption » Fri Dec 21, 2012 4:01 pm

Not addressing your question, but just a word of warning. I assume your HELOC provider will need to sign a subordination agreement. Do you know that there is not any issue given that you are taking $20K more that is senior to their interests? Perhaps your CLTV is ok, but that may not matter given that what you are doing is adverse to them. Particularly if this HELOC is on advatageous terms for you, then they could make things dificult.
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Re: Deductibility of HELOC interest after cash-back refinanc

Postby FNK » Fri Dec 21, 2012 4:22 pm

I was curious about the same exact question, and it appears that IRS is being nice to us here. Pub 936, Mixed-use mortgages says that principal payments kill off home equity debt ($100K limit) first and home acquisition debt ($1M limit) last.

Caveat emptor, consult TurboTax your tax advisor, yada yada.
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Re: Deductibility of HELOC interest after cash-back refinanc

Postby markcoop » Sat Dec 22, 2012 5:11 pm

FNK wrote:I was curious about the same exact question, and it appears that IRS is being nice to us here. Pub 936, Mixed-use mortgages says that principal payments kill off home equity debt ($100K limit) first and home acquisition debt ($1M limit) last.

Caveat emptor, consult TurboTax your tax advisor, yada yada.


I read through pub 936 a bit. I agree with your statement that you kill the home equity debt first. So in my example, I believe option (2) above is my answer since I paid back the $20k that I took out for the cash-back refi, therefore $100k is the max I can borrow from the HELOC and deduct the interest. I also believe the answer to my second question is one can deduct interest on loans up to $100k for any year. In other words, every year you see how much home equity debt you have. If I used $100k this year, but then paid back $10k, I can then take another $10k out and deduct the interest.
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