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AFAIK, the mortgage interest is only deductible when used to buy or substantially improve the house. But I did not see any mentions of when the improvements must take place.

Imagine, I take a $500,000 mortgage loan (or refinance) in October 2023. I use $450,000 to buy the house. I plan to use $10,000 in January 2024 to make valid home improvements. Then I will use $20,000 in January 2025 to make more valid home improvements.

Does this mean my home acquisition debt is $480,000 (since this money was used to buy or substantially improve the house)?

Publication 936

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt.

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I believe you need to look at the details in pub 936

Mortgage treated as used to buy, build, or substantially improve home. A mortgage se- cured by a qualified home may be treated as home acquisition debt, even if you don't actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

  1. You buy your home within 90 days before or after the date you take out the mort- gage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Exam- ple 1, later.)
  2. You build or substantially improve your home and take out the mortgage before the work is completed. The home acquisi- tion debt is limited to the amount of the ex- penses incurred within 24 months before the date of the mortgage.
  3. You build or substantially improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2, later.)

The second numbered item seems to apply. You aren't done making the improvements, when you get the mortgage. Therefore you can only count the expenses that took place in the preceding 24 months. You can't count the expenses after settlement.

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  • I see. Interesting. It's interesting how "backwards looking" this is. I'd have expected that at least the improvements made in the same tax year as the refinance are treated as home home improvements. It's especially weird given that it's impossible to make any improvements until you buy the house which happens after the mortgage is taken.
    – Ark-kun
    Jul 20, 2023 at 2:25
  • It also does not quite mesh with the language around the refinancing which is forward-sounding. "Any additional debt not used to buy, build, or substantially improve a qualified". "Debt used to improve" seems to mean that the debt acquisition precedes the improvement. Otherwise it would have been "new debt used to repay for already done improvements". Maybe there is still difference between buying and refinancing.
    – Ark-kun
    Jul 20, 2023 at 2:28

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