USA Cash Out Refi $100k Interest Deduction Question

Jan 6, 2017
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United States
I've read multiple sites on this (as well as IRS 936) and still a bit unclear. Can someone help answer based on the scenario below:

1) Purchase main residence for $1M, put $900k down and take $100k loan
2) Pay down (over time) the loan to $80k
2a) Assume Fair Market Home Value is still $1M
3) Do cash-out refi of $270k
3a) In this case, new loan amount is $350k ($80k remaining + $270k cash out)

Of the new loan amount, how much of the interest is tax deductible? It's not quite clear if it's $100k + original equity of the home (original equity would have been $900k), or if it's $100k total, or if it's some other amount.

Also (say it's $100k), how is the deduction amount of the "interest on first $100k" calculated? At first I read this as the first $100k in interest payments is tax deductible, but don't think that's right. If it's only the interest on the first $100k, then you just assume the same rate you are paying on the higher total loan amount (say $350k at 4% in the example below), then determine what the interest would have been for that calendar year on $100k at the same rate and that deductible amount? Nice and confusing.

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