A homeowner is in foreclosure for several years, and has not paid or deducted any mortgage interest during this time. The homeowner and the lender agree to a mortgage modification under which the homeowner pays the full principal and all past due interest. This amount is then refinanced into a new mortgage.

Since the original mortgage is now satisfied, along with all past due interest, can the homeowner deduct the past due interest on his taxes in the year the mortgage is refinanced?

as the loan is repaid the the remaining balance is deductible; There are two types of debt that qualify for the mortgage interest tax deduction: acquisition debt and equity debt. Acquisition debt is any secured loan you get to buy, build, or remodel your main or second home. It includes refinanced debt up to the amount of your old mortgage balance just before doing the refinance. The total amount of interest you can deduct for acquisition debt is limited to one million dollars for your main and second home (or $500k if you’re married filing separately).


When you refinance a mortgage that was treated as acquisition debt, the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage. The excess over the old mortgage balance is treated as home equity debt. Interest on up to $100k of that excess debt may be deductible under the rules for home equity debt. Also, you can deduct the points you pay to get the new loan over the life of the loan, assuming all of the new loan balance qualifies as either acquisition debt or home equity debt of up to $100k.