Tax implications of refinancing your mortgage 

Are mortgage refinance costs tax deductible?

Most of the costs associated with refinancing a personal mortgage are, alas, not tax deductible. The IRS does allow you to deduct a few of the costs, though, which we’ll cover next. If you are refinancing a rental or investment property, on the other hand, the IRS allows you to deduct many more of the costs.

What are deductible mortgage refinance costs? 

For a personal mortgage refinance, the IRS allows you to deduct the cost of borrowing money to refinance, including mortgage interest and points, which are essentially interest you prepay when you close on your refinance. The IRS also allows you to deduct property tax as part of the state and local tax (SALT) deduction.

Keep in mind that you must itemize in order to claim these deductions. If you choose to take the standard deduction instead, you will not be eligible to write off these costs.

If you are refinancing a mortgage for a rental or investment property, the IRS allows you to deduct most closing costs and fees, too, but not right away. You can deduct these costs over the life of the loan.

Can you deduct mortgage interest after refinancing?

Yes, you can deduct mortgage interest after refinancing. How much interest you can deduct is based on when you bought your house (the date you took out the original loan).

If you bought your home after December 15, 2017, you can write off interest on up to $375,000 in debt (if single or married filing separately, or up to $750,000 if married filing jointly). If you bought your home before that date, you can write off interest on up to $500,000 of debt (if single or filing separately, or $1 million if married filing jointly).

Are refinance points tax deductible?

Yes, refinance points are tax deductible, but not immediately. Since refinance points allow you to prepay some of the interest, the IRS requires that you deduct the points over the life of the loan instead of all at once.

How to deduct points over the life of the loan 

To deduct points over the life of your mortgage, find your amortization rate. This is the yearly amount you can deduct. To calculate it, simply divide the total dollar value of your refinance points (a point is 1%) by the number of scheduled payments over the life of the loan (for example, 360 payments for a 30-year mortgage). Then, multiply that per-payment amount by the exact number of mortgage payments you made during that specific tax year

Let’s say, for example, you pay $6,000 in points when you close on a refinance for a new 30-year mortgage. You are scheduled to pay 360 total payments, giving you a rate of $16.67 per payment. Then, multiple the $16.67 per-payment amount by the number of payments you made during the year, most likely 12. In this case, you can deduct $200 per year. If you only made 11 payments during the year, the point amortization deductible amount is $183

Which refinance closing costs are tax deductible?

Personal refinance closing costs, such as appraisal fees, title insurance and search fees, credit check fees, recording fees, and legal fees, are not deductible. On the other hand, refinance closing costs for rental or investment properties are usually deductible, but over the life of the loan, not all at once.

Do refinance tax rules differ for a rental property?

Yes, if you’re refinancing a rental property, the IRS sees the costs as necessary and ordinary, since they’re part of securing financing for your business. That’s why it lets you deduct so much more than personal filers, including many closing costs and fees.

As previously mentioned, the IRS requires that you deduct these business costs over the life of the loan rather than all at once. So if, for example, your closing costs for refinancing your rental property are $3,000 and you have a 30-year mortgage with 360 scheduled payments and you make 12 payments during the year, you can deduct your closing costs at a rate of $100 per year.

How does a cash-out refinance affect your taxes? 

The money you pull from your home equity with a cash-out refinance (a mortgage replacement process that allows you to pull out home equity by taking a larger loan than you currently owe) is completely nontaxable for federal tax. Why? Because the IRS see it as money you’re borrowing and will eventually pay back, not as income.

You can also deduct the cost of interest for the loan, if you use the money to buy, build, or improve the property, as well as any points you purchase at closing over the life of the loan.

What tax forms and records do you need after refinancing? 

• Form 1098, Mortgage Interest Statement: Your lender reports the mortgage interest, points, and any paid escrow real estate taxes on this form. You will receive two when you refinance, one for the original loan and one for the refinanced loan.
• Closing disclosures or settlement statement: This is where you’ll find information about fees, interest, and points you paid at closing, and serves as proof if the IRS ever asks you to back up interest you deduct.
• Property tax statements: Keep statements of property tax you pay throughout the year, regardless of whether you pay it directly or through an escrow account.
• Home improvement receipts: If you are doing a cash-out refinance to free up cash for property improvements, and you want to deduct refinance points and interest, keep receipts and all other documentation.

If you claim a deduction, and don’t have the documentation to back it up if the IRS ever comes knocking, the IRS could revoke your deduction, and you could end up owing penalties and interest on unpaid tax.

While refinancing can be a great way to save money every month, the rules around what you can and can’t deduct are complicated. If you have questions or concerns, or need tax help, don’t hesitate to reach out. Your local Jackson Hewitt Tax Pro is here all year and ready to help. Find tax services near you, then walk in or book now.