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Mortgage Interest Round Two

Q.  The new tax law eliminates the deduction of interest for home equity loans, but  I can’t seem to get an answer on whether the interest on our “Home Equity First Mortgage” from our federal credit union will be deductible. We refinanced our existing FHA first mortgage last month based on the equity in our home, and the mortgage docs shows it as a conventional fixed rate loan for 10 years.  I’d hate to have to do a whole new refinance if we don’t need to for the mortgage deduction…

A.  Chances are pretty good that your refinance is deductible, but that depends on how the proceeds of the loans were used.

I will assume all of the proceeds from the original FHA loan were used to acquire the  residence. 

When refinancing, proceeds can be used for various purposes, such as:

1) pay off the old loan,

2) to make improvements to the residence, and

3) other purposes, like college or wedding costs.

Of these, proceeds used for 1 .and 2. qualify as acquisition debt, so interest on this portion of the refinance would still be deductible.

Proceeds used for other purposes (3.)  is not acquisition debt;  the related interest would be deductible as home equity interest under 2017 law, but is not deductible under 2018 law.

 


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