With higher credit card interest rates and the end of deductible home equity loan interest, Fannie Mae just reported that in the last quarter 80 percent of mortgage refinancings were cash out transactions. Some taxpayers may be using the net proceeds to pay down credit cards, pay college bills, buy a car, or for other purposes unrelated to the acquisition or substantial improvement of a residence. Clients may believe that because it is just one payment and it is all secured by the residence, the interest is all deductible. However, the interest on cash taken out for non-home related expenses is not deductible. In effect, the refinancing is treated like two different loans, one for the original acquisition or for the substantial improvement of the residence and the other for debt that is not qualified for the deduction.
The 2018 Schedule A will include a new box to check if not all proceeds from a home mortgage were used to buy, build or substantially improve a home. In order to be prepared to answer this question, it should be included in your organizer to the taxpayer. This may be bad news to clients who have already refinanced without knowing the consequences.