There are three tax rules you should know about when you’re considering a cash-out refinance to fund home improvements:
- In order to deduct the interest on the mortgage as acquisition indebtedness, the IRS requires the project to be a “Substantial Improvement” that:
- Adds to the value of the home
- Prolongs the home’s useful life, or
- Adapts the home to new uses. For example, painting a room may not qualify, but an addition or new kitchen may qualify.
- You Have a 24-Month Look-Back Period. If you are pulling cash out to reimburse yourself for improvements already made, those improvements must have occurred within the past 24-months in order to qualify for the acquisition indebtedness deduction.
- You Have a 12-Month Look-Forward Period. If you are pulling cash out in order to make future home improvements, you’ll need to complete the home improvements within the next 12-months in order to qualify for the acquisition indebtedness deduction.
In all these cases, you’ll need to show receipts in case of an audit. PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.