Taxpayer has refinanced several times since original purchase in 2000. I have three closing statements (2009, 2010, and 2016). Practically speaking, I know some of this is equity loan (versus acquisition), but since I do not have the 2000 closing statement nor do I know how much they used to make improvements to the home, what questions should I be asking the client and then how do I determine how much of the interest expense to exclude? This seems to be extrememly complicated (and if we can't figure it out, how will the IRS be able to)? I can see how to do this on new loans, but on ones that are old, I'm just not sure how to go about this. Would be interested to know how others are handling this.
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With this being year 1 for this type of scenario involving refinance cash out with a portion not being used for home improvement, the Mixed use provisions under Pub. 936 on Page 12 are being used by preparers.
In this scenario regarding the 2000 purchase and subsequent refinancing, you would need to speak with your client to determine how much of the refi cash out was put back into the house as qualifying improvements. Admittedly, the client may not recall and records retained by banks for 2000 and 2009 may have lapsed.
This is likely to be a hot topic for clarification by tax preparer and accountant advocacy groups.
In the example if the 25,000 was used 50/50 for improvements and personal use you would adjust the amounts. 162,500/175,000 or 93% would be acquisition. 12,500/175,000 or 7% would be equity. Apply the percentages to the 1098 interest.
Pub 936 explains the definitions and loan limits.
Part II TABLE 1 does not appear to help breakdown the situation you are asking about unless the mortgages are more than the 1Mil or 750K loan limits.
This is my understanding. If others are calculating it differently I’d be curious to know your process.