Tax deductions

Mortgage Refinance Tax Deductions Every Homeowner Should Know


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Most homeowners refinance their mortgage to take advantage of a lower interest rate, adjust their payment terms, or tap into their home equity.

But you can also benefit from several mortgage refinancing tax deductions. These deductions, which you can claim after refinancing your mortgage, minimize the amount of federal income tax you owe – and you shouldn’t be leaving any on the table.

Here’s what you need to know about mortgage refinancing tax deductions:

What is a refinancing tax deduction?

When filing your taxes, you may have the option to claim tax deductions and tax credits. Both reduce the amount of taxes you owe but affect your tax situation differently:

  • Tax deductions reduce your taxable income. For example, the mortgage interest deduction allows you to deduct the interest paid on your mortgage that year from your income, reducing the amount of tax you owe.
  • Tax credits, on the other hand, offer a dollar-for-dollar reduction in your tax liability. For example, if your tax payable is $ 5,000 and you have a tax credit of $ 1,000, applying the tax credit would reduce your tax payable to $ 4,000.
Tax deduction Tax credit
Included at the start of your return Included at the end of your return
Reduces the amount of your tax income Directly reduces the amount of money you owe in taxes
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What expenses can I deduct?

When you refinance your mortgage, several expenses can be tax deductible and are similar to buying a home. You can already claim some of these deductions if you file a detailed income tax return.

Some of the overlapping tax deductions for buying or refinancing a home include:

  • Mortgage interest payments
  • Mortgage loan insurance premiums
  • Mortgage points
  • Closing costs of a rental property

While you pay qualifying expenses up front, the deduction reduces your taxable income on your tax return. Mortgage refinancing tax deductions may apply to your primary, secondary or rental residence.

Good to know: The Tax Cuts and Jobs Act 2017 (TCJA) reduced the number of tax-deductible mortgage loan expenses and also doubled the minimum number of deductions for filing a detailed return.

In most cases, you can only deduct interest on a mortgage or cash refinance if you are using the funds to “buy, build, or significantly improve” your primary or secondary residence, according to the IRS.

Another notable change in the tax reform is to reduce the mortgage interest deduction to $ 750,000 in eligible debt for mortgages contracted after December 15, 2017.

Standard and Itemized Deductions: What You Need to Know

The TCJA tax reform doubled the standard deduction for taxpayers. Your filing status determines the minimum amount of deductions you need to claim itemized deductions on Planning a of your Form 1040 federal income tax return.

Here are the amounts of the standard deductions for the 2021 tax year:

Filing status Amount of the standard deduction
Single or married deposit separately $ 12,550
Married spouse filing $ 25,100
Head of household $ 18,800

In addition to eligible mortgage expenses, some of the itemized deductions include:

  • Charitable donations
  • Medical and dental expenses
  • Local and national taxes on income, sales and property
For example: A married couple who jointly deposits $ 4,900 in itemized “below-the-line” deductions with $ 30,000 in qualifying tax deductions:
Total deduction of $ 30,000 – Standard deduction of $ 25,100 = Detailed deduction of $ 4,900
In this tax situation, it makes sense to itemize and deduct eligible mortgage expenses.

However, you will need to claim the standard deduction if your itemized deductions do not exceed the standard deduction amount for your filing status.

4 refinancing tax deductions you should know

Although you can’t deduce everything mortgage refinancing fees, here are several common deductions.

Mortgage interest

The mortgage interest deduction is the simplest refinancing tax deduction to qualify for. Your lender will send Form 1098 when you make at least $ 600 in annual interest payments. Interest payments for the original mortgage and any refinancing count toward your deduction limit.

You can deduct interest payments up to $ 750,000 in combined mortgage debt for a primary and secondary residence. The deduction limit is only $ 375,000 if you are married and file separately.

Interest payments for a home equity loan may also be eligible if you are only using the loan proceeds to buy, build, or improve the home as security.

To note: The deduction limit remains at $ 1 million for “grandfathered” mortgages taken out on or before December 15, 2017.

Don’t miss: How To Get The Best Mortgage Refinance Rates

For interest rate and term mortgages

A rate-and-term refinance replaces your interest rate, the term of your mortgage, or both with new terms and leaves your equity intact. Your home must secure the loan for the interest to be tax deductible.

For cash-out refinancing

To qualify for a tax deduction on your refinance withdrawal, you will need to use your available equity to make capital improvements on the residence securing your mortgage.

Home capital improvements can help you qualify for additional tax deductions.

Using the loan proceeds for other purposes such as consolidating credit card debt or going on vacation makes the interest non-deductible.

Advice: If you refinance more than the original mortgage amount, interest on the excess debt is not deductible. For example, if you refinance a new loan for $ 50,000 more than your original principal, the interest payments for the additional product are not deductible.

Learn more: Tax implications of refinancing withdrawals

Discount points

Buying mortgage points lowers your interest rate since you pay the interest in advance. Typically, you deduct points over the life of the loan, but you may be able to deduct all of the expenses in the same tax year that you refinance.

Here are some basic requirements for claiming the full deduction:

  • Your primary residence must guarantee the loan
  • The cost of points cannot be higher than the general cost of your region
  • You substantially improve your primary residence
  • Points do not cover miscellaneous fees or property taxes

Check IRS Requirements to determine if you qualify for a full mortgage points deduction this year.

Closing costs of a rental property

Most of the closing costs of a rental property are tax deductible on Schedule E and do not require the filing of an itemized return.

Some of the eligible costs include:

  • Summary Fee
  • Legal fees
  • Registration fees
  • Title insurance

However, some expenses cannot be deducted when you refinance your rental property. One example is mortgage points when the loan amount is greater than the initial balance.

For example, if you have taken out a cash refinance on an investment property that has appreciated in value, any portion of the points that exceeds the original loan balance cannot be deducted as a rental expense.

What you can’t deduct on mortgage refinancing

Unfortunately, the mortgage refinancing tax deduction does not apply to the closing costs of your primary or secondary residence.

You can only deduct expenses related to personal mortgages that are reported on Form 1098.

These mortgage refinancing fees are not tax deductible:

  • Assessment fees
  • Lawyer fees
  • Credit file fees
  • Escrow Fee
  • Inspection fees
  • Legal fees
  • Registration fees
  • Title insurance

If you prepay interest for future tax years at the close of the refinance, you will likely have to deduct a portion of the payment on future tax returns.

Not being able to deduct these fees increases your refinancing costs. The However, the best refinancing companies can minimize your non-deductible expenses and help you get better loan terms.

About the Author

Josh Patoka

Josh Patoka is an authority on personal finance and a contributor to Credible. His work has been published on Fox Business and several award-winning personal finance blogs, including Well Kept Wallet, Wallet Hacks, and Frugal Rules.

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