Mortgage Refinance and $1M interest deduction limit - lost grandfathering status?

Thanks so much for this! Do you know exactly where in Publication 936 I can find this? I want to make sure I have the exact language when I talk to my CPA again.

You'll want to look in Publication 936 under the section "Limits on Home Mortgage Interest Deduction." There's a specific subsection about grandfathered debt and refinancing that addresses your exact situation. If your debt was taken out before December 15, 2017, and your refinance didn't increase the principal (except for refinancing costs), then you maintain the $1 million limit. When you talk to your CPA, you might also want to print out the relevant section. Sometimes tax professionals deal with so many different situations that they might mix up certain rules, especially with changes that happened after the Tax Cuts and Jobs Act.

Does it actually work with complicated mortgage situations? I've got a jumbo loan that I've refinanced twice and I'm never sure if my tax guy is handling it right.

I'm skeptical about these AI tax tools. How does it actually know about specialized situations like mortgage grandfathering? Wouldn't a human tax pro still need to review everything?

It absolutely works with complicated mortgage situations. The system is specifically designed to handle complex scenarios like multiple refinances, jumbo loans, and mixed-use properties. It analyzes the full history of your mortgage transactions to determine how current tax laws apply. Regarding skepticism about AI tax tools, I completely understand the concern. What makes this different is that it's specifically trained on tax law and IRS publications, including all the exceptions and special rules. It doesn't just give generic advice - it cites the specific IRS regulations and publications that apply to your situation. You can use the analysis to verify everything with a human tax pro if you want, but I found it actually knew more about this specific area than my accountant did.

How does this actually work? The IRS phone system is notoriously impossible to navigate. Are they somehow bypassing the phone tree?

This sounds like complete BS. Nobody can magically get through to the IRS. I've tried calling dozens of times and either wait for 2+ hours or get disconnected. If there was actually a way to get through, everyone would be using it.

The service works by using an automated system that navigates the IRS phone tree and waits on hold for you. When they reach a live agent, you get a call connecting you directly to that agent. They don't bypass anything - they just handle the frustrating waiting part. Regarding the skepticism, I totally get it. I felt exactly the same way before trying it. I had spent three separate occasions waiting on hold for over an hour before getting disconnected. What convinced me was that if it didn't work, they guaranteed a refund. I figured I had nothing to lose. The call back came in about 20 minutes, and I was connected to an actual IRS representative who answered my mortgage deduction question. No magic involved - just technology handling the mind-numbing hold time.

What if you DID take some cash out when refinancing? Like if the original loan was $850k, and you refinanced for $900k? Does that completely kill the grandfathering or just for the extra $50k?

If you took cash out when refinancing, the grandfathering still applies to the portion that was paying off the original acquisition debt, but not to the additional cash-out amount. In your example with an original loan of $850k and a refinance for $900k, you would still get the grandfathered $1M limit treatment for the $850k portion, but the additional $50k would be subject to the rules for home equity debt. Depending on what you used that $50k for, it might not be deductible at all under current rules unless it was used for buying, building, or substantially improving the home.

Since you bought your house in 2018 (after the Tax Cuts and Jobs Act took effect), you're under the new $750k limit. But your mortgage is $640k, which is below the $750k limit anyway, so you can deduct all of your mortgage interest (assuming you itemize deductions rather than taking the standard deduction). The grandfathering issue only matters for people with mortgages over $750k that originated before December 15, 2017.

Thx! That makes sense. So basically I'm fine since my loan is under the 750k anyway. I do itemize cause my state taxes and mortgage interest and donations add up to more than the standard deduction. I thought maybe there was some kinda percentage thing where i could only deduct part of the interest! Tax stuff is so confusing lol.

Absolutely agree! This thread has been incredibly helpful. As someone new to this community, I'm amazed at how knowledgeable everyone is about these complex tax situations. I've been dealing with mortgage interest deduction questions myself and wasn't even aware of the grandfathering rules until reading this discussion. It's concerning that so many tax preparers seem to be missing this important distinction. Makes me wonder what other deductions people might be losing out on because of misunderstood rules. Really appreciate everyone sharing their real experiences and the specific resources like Publication 936 citations - that's exactly what newcomers like me need to navigate these situations confidently.

This is such valuable insight from someone in the mortgage industry! It's really reassuring to hear from a loan officer who sees this confusion firsthand. I'm curious - do you find that borrowers are generally unaware of these tax implications when they're considering a refinance, or do they usually ask about it upfront? As someone new to homeownership and tax planning, I'm realizing there are so many interconnections between mortgage decisions and tax consequences that aren't immediately obvious. Your idea of including that one-page explanation with refinance packages is brilliant - it could save people thousands in missed deductions or incorrect filings. Do you have any other common tax misconceptions related to mortgages that homeowners should be aware of? I feel like there's probably a whole list of things that people get wrong!

Great question about borrower awareness! In my experience, about 80% of borrowers don't think about tax implications until after closing, which is unfortunate timing. The 20% who do ask upfront are usually either high-income earners with good CPAs or people who got burned by tax surprises in the past. Some other common misconceptions I see: 1) People think refinancing always resets their mortgage interest deduction to current rules (as we saw with Sofia's situation), 2) Many don't realize that home equity loans have different deductibility rules now - the money has to be used for home improvements, not just anything, 3) With cash-out refinances, people often don't understand that only the portion used for home improvements might be deductible as mortgage interest. I've also seen people accidentally lose deductions when they pay down principal aggressively and then later take out a HELOC, thinking it's the same as their original mortgage for tax purposes. The timing and purpose of different loan products really matters for tax treatment. @naila I'd definitely recommend discussing tax implications with both your loan officer and tax preparer before making any mortgage changes - not after!