Will the interest on the refinanced loan on our main house be fully deductible?

We are refinancing our main home to purchase a second home with a no-point, no-cost loan. The refinance loan is about 4 times the amount of our original loan and 3 times the amount of the main house's original price. The refinance loan will be approximately 100% of the main house's current appraised value. The proceeds from the new loan will be used to buy the second house and to pay 5 years of back taxes (approximately $50,000) that we will incur from losing an agricultural exemption and a homestead exemption. Will the interest on the refinanced loan on our main house be fully deductible if used as described?

When you refinance a mortgage on a first or second home for the same amount as the remaining principal balance on the old loan, there is no change in the tax treatment of the interest. In other words, if interest was fully deductible on the old loan, then it is fully deductible on the new loan.

If you refinance a home mortgage for more than the existing balance, the deductibility of interest on the excess amount depends on how you use the funds and the amount of refinancing. If the excess amount is used to buy, build, or substantially improve your first or second home, then it is considered home acquisition debt. If the excess plus all other home acquisition loans does not exceed $1 million ($500,000 if married filing separately), the interest is fully deductible. If the excess is used for any other purpose, such as to pay off credit card debt or to finance a child's education, the excess is considered home equity debt. If the excess plus all other home equity loans does not exceed $100,000 ($50,000 if married filing separately), the interest is fully deductible. If the refinanced loan is partly home acquisition debt and partly home equity debt, the overall limit of $1.1 million applies ($1 million home acquisition debt and $100,000 home equity debt), or, if married filing separately, $550,000 ($500,000 plus $50,000).

Interest paid on loans in excess of home acquisition and home equity debt ceilings is generally treated as nondeductible personal interest unless the proceeds are used for business or investment purposes.