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Does rolling refinancing costs into new mortgage result in excess interest

mappp
Level 4

Several clients have refinanced their homes this year.  The new mortgage is the balance of the old loan AND the refinance costs.  This method results in a new balance that is higher than the old loan balance.  My question is:  does this method result in non-deductible mortgage interest because the new loan balance is higher than the old loan balance?  I been searching for an exception of the old balance and new balance being an exact match and can't find it.  Am I missing something or do I have to treat the refi costs as generating excess interest?

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4 Replies 4
linette
Level 5

Many think it does.

There was a lot of discussions on this when the change went into affect.

I am encouraging taxpayers to not refinance to avoid this headache.

What do you think?  Is putting the closing costs back into the loan money that was not used to buy or improve the property?

smetzel
Level 1

"I am encouraging taxpayers to not refinance to avoid this headache."

 

I would not discourage refinance, but instead, encourage taxpayers to pay the closing costs upfront instead of rolling into the new loan.

rbynaker
Level 11

In my opinion, the additional proceeds are not used to buy, build or substantially improve the home.  The repayment rules are taxpayer friendly though so it's likely only excess for a year.

dascpa
Level 8

You are correct, qualified mortgage interest is interest on the original loan balance as paid down. Refinancing and including the closing costs in the new loan technically does create nondeductible interest. The question becomes materiality.  If I add $3,000 to a $600,000 loan you're talking 0.5%.  Is it material enough to subtract out 0.5% of annual mortgage interest from the 1098?  Some people will say yes, others no. I've taken the position that I explain it to the client that there is a risk under audit of this deduction being denied. 99% have said they accept the risk and they believe it is not material enough to adjust. The key to all these items in life is to document and protect yourself as the tax preparer. There is a lot of gray items - noncash donation valuation anyone?