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Refinancing? Max out interest deductions

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in Small Business Tax

Q: In a recent article, you said people could deduct mortgage interest on a refinanced loan up to the amount of the original loan balance. (See 2/7/05 issue.) Isn't the limit the outstanding amount of the loan before the refinancing? M.L., New York

A: In fact, what we really meant when we said "original loan balance" was the balance of the original loan as of the refinancing date. We can see how you would have been confused. For example, if the original principal amount of your loan was $250,000 and you paid it down to $225,000 as of the refinancing date, you can treat $225,000 of the new loan as home acquisition debt and deduct all the interest on that amount on your Schedule A. In general, you can also deduct the interest on up to another $100,000 of additional debt under the home-equity debt rules.

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