Three Things You Should Know About Pulling Cash-out For Home Improvement

There are three tax rules you should know about when you're considering a cash-out refinance to fund home improvements:

1. In order to deduct the interest on the mortgage as acquisition indebtedness, the IRS requires the project to be a "Substantial Improvement" that:
   1. Adds to the value of the home
   2. Prolongs the home’s useful life, or
   3. Adapts the home to new uses.  For example, painting a room may not qualify, but an addition or new kitchen may qualify.
2. 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.
3. 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.