I have some land that I want to build on. I plan to apply for a construction loan to build the house, which will be a second home. Within 90 days after the completion of construction, can I refinance this loan for an amount that is larger than the original construction loan and have it count as home acquisition debt for tax purposes? Or, following the completion of construction, but within 90 days, could I get a home equity loan and count it as home acquisition debt?

ANSWER

The BIDaWIZ Team's Answer:

The answer to your question largely depends on the original construction loan size, how much you'd like to refinance, and the outstanding debt on your primary residence. Per IRS publication 936, the total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Amounts that exceed that limit (up to $100,000) would be treated as home equity debt (i.e. line of credit). Therefore, if you have an existing mortgage of $350,000 on your primary residence and are applying for a $400,000 construction loan with plans to refinance at $500,000, you can deduct the interest on all of the debt. The reason is that the $350,000 plus the $500,000 or $850,000 in total is less than the $1 million of home acquisition debt. In addition, since the amount you refinanced on the construction loan increased by $100,000 or from $400,000 to $500,000, you can still deduct the entire amount because the increase would fall within the home equity debt limitation (i.e. line of credit).