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Secure deductions for ‘grandfathered debt’

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in Small Business Tax

Q. We bought our home in 1983. Since our youngest child is entering college next fall, we want to refinance. Different mortgage lenders have given us conflicting advice. Will we be able to deduct all the mortgage interest paid on the loan after the refinancing? Boise, Idaho

A. Probably. The basic rules:

All mortgage debt existing prior to Oct. 14, 1987, (known as “grandfathered debt”) is treated as acquisition debt, regardless of the amount. The mortgage interest on post-Oct. 13, 1987, acquisition debt is deductible on debts up to $1 million; the interest on home-equity debt is deductible up to $100,000.

If a grandfathered debt is refinanced, it’s treated as acquisition debt up to the amount of the existing debt. That amount is treated as grandfathered debt only for the remaining term of the original debt.

Any excess may be treated as acquisition debt or home-equity debt, but the total debt can’t exceed the home’s fair-market value.

Example: Say you have $100,000 debt remaining on your 1983 loan. If you refinance for $200,000 and the house is currently worth $300,000, $100,000 of the refinanced debt is considered grandfathered debt. You can treat the remaining $100,000 debt as acquisition home-equity debt.

Note: Mortgage-interest deductions are subject to the reduction of itemized deductions for high-income taxpayers.

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