Mortgage Interest Deduction -- Cash-Out Refi


R

Ron Sheldon

I'm 63, plan to retire in 2 to 5 years and relocate to an
area several hundred miles from where I now live.

My home has a market value of about $600,000 with an
outstanding mortgage of about $146,000, which I sell when I
retire and relocate.

I'm considering refinancing my home with a 3 or 5 year
interest only ARM mortgage of about $380,000 to $400,000.

Refinance proceeds would:

1. Pay off the existing $146,000 mortgage.
2. Pay closing costs on the refinance [avoiding points and
loan origination fees].
3. Establish a $10,000 to $30,000 emergency fund
4. Pay off an existing mortgage balance of about $50,500 at
interest rate higher than refinance rate on a rental home in
the area where I intend to relocate in retirement [overall
tax deduction will decrease].
5. Pay for the acquisition of a $155,000 to $170,000 new
construction home this year in the area where I intend to
relocate in retirement, which will be a rental home until I
relocate. Note: While I could obtain a mortgage on this
property, because it won't initially be owner occupied, the
mortgage interest rate [and tax deduction] would be higher
than on the refinance mortgage.

I've read that the interest on the amount of cash-out
refinance that exceeds the refinanced mortgage plus $100,000
[interest on amount over $246,000 in my circumstance] will
not be deductible for income tax purposes unless it is used
to buy, construct or substantially improve a home.

Will the purchase of the $155,000 to $170,000 new
construction home and/or pay off of $50,500 existing rental
home mortgage from the refinance proceeds allow interest
deduction on excess over the $246,000?

If so, does it include the amount used for both, only amount
for purchase of new construction home, or only amount to pay
off of existing rental home mortgage? Also, what document
trail should I create regards use of refinance proceeds in
case of an IRS audit.

If use of most of the excess refinance proceeds for rental
home mortgage pay off and/or purchase new construction home
does not qualify for deduction of interest on amount over
$246,000, I'd appreciate any suggestions that may help me
accomplish the above with minimum income tax impact.

Thanks in advance,

Ron Sheldon
 
Last edited by a moderator:
Ad

Advertisements

R

Ron Sheldon

Almost a week and no input as yet re my posting. If my
explanation of circumstances, purposes and/or reasons were
unclear, please let me know and I'll try to add/revise.

If what I'm asking is more than anyone wants to address,
please direct me to IRS pubs, rulings, etc. that may give me
guidance on:
Will the purchase of the $155,000 to $170,000 new
construction home and/or pay off of $50,500 existing rental
home mortgage from the refinance proceeds allow interest
deduction on excess over the $246,000?

If so, does it include the amount used for both, only amount
for purchase of new construction home, or only amount to pay
off of existing rental home mortgage? Also, what document
trail should I create regards use of refinance proceeds in
case of an IRS audit.
Again, thanks in advance,

Ron Sheldon
 
Last edited by a moderator:

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads


Top