Refinanced Acquisition Debt Term
Prior to TCJA, taxpayers could refinance acquisition debt for the amount of the amortized balance with an unlimited extended term for the refinanced loan. Under TCJA, the $1,000,000/$500,000 limits continue to apply to refinances of acquisition debt incurred before 12/16/2017. However, TCJA only allows the refinanced acquisition debt to be treated as acquisition debt for the remainder of time left under the terms of the original loan (see exception below).
Example #1: After 20 years, an original 30-year term acquisition debt of $200,000 has an assumed amortized balance of $100,000. The homeowner refinances the original loan for a new one with a balance of $150,000 and a term of 20 years. Because of TCJA’s limits on loan terms, the refinanced loan will only be treated as acquisition debt for the first 10 years (30 years – 20 years) and the interest on the last 10 years of the refinanced loan will not be deductible.
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Exception
If the principal of the original indebtedness was not amortized over its term, the loan’s acquisition debt would continue to be treated as acquisition debt through the expiration of the term of the first refinancing of the indebtedness (or if earlier, the date that is 30 years after the date of the first refinancing). (Code Sec. 163(h)(3)(F)(iii)(II)) as amended by TCJA §11043)
Commentary: Where a home acquisition debt is refinanced for an amount more than the current amortized balance of the loan it will result in a loan that is part acquisition debt and part equity debt. When this occurs, you basically treat the debt as two loans, one being acquisition debt and the other equity debt. The interest is allocated, proportionally between the two debts, per Reg. Sec. 1.163-8T interest allocation rules, resulting in deductible acquisition debt interest and equity debt interest, which may or may not be deductible, depending on how the loan funds are used.
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Example #2 – Post-2017 Refinance: Married taxpayers have an acquisition debt loan with a balance of $175,000. They refinance that loan for $400,000 and do not use any of the proceeds to make improvements to the home. As a result, the taxpayers have a mixed debt loan consisting of:
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Home Acquisition Debt…. $175,000
Home Equity Debt…………. 225,000
Total Refinanced Debt……$400,000
The interest on the $175,000 portion of the debt is deductible as home acquisition debt interest. The balance of the refinanced debt, $225,000, is excess debt and the interest on this portion of the loan is deductible only if its use can be traced to another deductible use.