I'm 63, plan to retire in 2 to 5 years and relocate to an area several hundred miles from where I now live. My home has a market value of about $600,000 with an outstanding mortgage of about $146,000, which I sell when I retire and relocate. I'm considering refinancing my home with a 3 or 5 year interest only ARM mortgage of about $380,000 to $400,000. Refinance proceeds would:
- Pay off the existing 6,000 mortgage.
- Pay closing costs on the refinance [avoiding points and loan origination fees].
- Establish a ,000 to ,000 emergency fund
- Pay off an existing mortgage balance of about ,500 at interest rate higher than refinance rate on a rental home in the area where I intend to relocate in retirement [overall tax deduction will decrease].
- Pay for the acquisition of a 5,000 to 0,000 new construction home this year in the area where I intend to relocate in retirement, which will be a rental home until I relocate. Note: While I could obtain a mortgage on this property, because it won't initially be owner occupied, the mortgage interest rate [and tax deduction] would be higher than on the refinance mortgage.
I've read that the interest on the amount of cash-out refinance that exceeds the refinanced mortgage plus $100,000 [interest on amount over $246,000 in my circumstance] will not be deductible for income tax purposes unless it is used to buy, construct or substantially improve a home. Will the purchase of the $155,000 to $170,000 new construction home and/or pay off of $50,500 existing rental home mortgage from the refinance proceeds allow interest deduction on excess over the $246,000? If so, does it include the amount used for both, only amount for purchase of new construction home, or only amount to pay off of existing rental home mortgage? Also, what document trail should I create regards use of refinance proceeds in case of an IRS audit. If use of most of the excess refinance proceeds for rental home mortgage pay off and/or purchase new construction home does not qualify for deduction of interest on amount over $246,000, I'd appreciate any suggestions that may help me accomplish the above with minimum income tax impact. Thanks in advance,
Ron Sheldon
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