I have a question concerning the deductibility of mortgage interest on our residence. We refinanced our home in November 1985 for $101,700, which was more than the original purchase price. We did not use the proceeds for home improvements or college or medical expenses. We refinanced again in November 1986 for $100,000 to obtain a lower interest rate. (This second refinancing is probably of no consequence in determining the "cost" for tax purposes.) Is there a "grandfather" clause in the tax legislation that permits the deduction of mortgage interest on an amount above the cost? If so, how does it work?

Yes, there is a "grandfather" clause, but the explanation was not very clear in last year's legislation. Reference to the joint committee discussion shows that the mortgage balance outstanding on Aug. 16, 1986, becomes a substitute ceiling. That is, interest expense on a principal amount not in excess of the Aug. 16, 1986, balance continues to be deductible in full even if that amount exceeds the basis of the house (cost plus capital improvements). The technical corrections bill now working its way through Congress will clarify this question and is expected to address your situation, too. If the debt instrument outstanding on Aug. 16, 1986, matures (for example, a five-year loan with a balloon payment), then the ceiling reverts to the basis. But refinancing of "grandfathered" debt will continue to be treated as qualified interest if the refinancing amount doesn't exceed the principal balance of the previous mortgage on that cut-off date. So you can see that the second refinancing is an important element. On the assumption that the remaining principal amount on the first ($101,700) refinancing was at least $100,000 on Aug. 16, 1986, interest on the second refinancing loan will qualify in full for deduction. qa Do the current capital gains regulations specify a minimum amount of time that a residence has to be used as a principal residence to meet the legal requirements for tax purposes? My husband and I own two houses. To minimize the capital gains tax, we want to live in the house with the greater appreciation prior to any sale. What is the minimum period required to qualify? If we sold and moved from this residence to a home of equal or greater value immediately upon the sale of this residence, would the capital gains tax not be an issue? To qualify for the one-time exclusion of up to $125,000 of gain on sale, you must have owned and lived in the home as your principal residence for at least three of the last five years. From your second question, however, I gather you are interested in the rollover provisions rather than the over-55 exclusion. For this purpose, there is no minimum qualifying time specified; the requirement is only that the home you sell be your principal residence at the time of sale. This is simply a matter of intent and can be demonstrated by such things as your voting registration, car registration, etc. If the home you sell is in fact your principal residence at the time of sale, then tax on the gain is deferred by reducing the cost basis of the new home (of equal or greater value) by the amount of the gain. Thus the gain on sale of the old home is not an immediate issue but comes into play on a later sale of the new home. Of course, if deferred long enough, you may then qualify for the one-time over-55 exclusion of up to $125,000.

qa I recently retired from the federal government and have the option of taking a lump sum payment equal to my contributions to the fund, with a reduced annuity. A large part of that lump sum payment will be taxable. May I roll the taxable portion over into an IRA and delay paying the tax until withdrawn?

No. For a partial distribution to be eligible for rollover to an IRA, the amount of the distribution must be equal to at least 50 percent of the value of the total pension fund held for the account of the employe. In virtually every instance, the employe contributions' total is considerably less than half of the annuity value, considering life expectancy at retirement. Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business News, 1150 15th St. NW, Washington, D.C. 20071.