Tax Deductions For Mortgage Refinancing
The largest tax deduction most people can claim on any mortgage is on the interest paid on the loan.
In most cases, mortgage refinance interest is tax-deductible, which means you can take it off your taxable income for that tax year.
But some rules apply.
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Rules for Making Tax Deductions on Mortgage Interest
First of all, the loan must be on either your primary residence or a secondary residence. If you take the deduction on a second residence, this can’t be a rental property.
The loan must be secured against your home. In other words, your home is acting as collateral. As a result, your home will be foreclosed in the event you don’t meet your mortgage repayments.
You’re also only able to claim this tax deduction if you itemize on your taxes. When itemizing, you’re adding every deductible expense individually and then deducting the total amount.
You can’t take this tax deduction if you take the standard deduction, which everyone is entitled to regardless of their circumstances.
Online tax platforms can help you figure out whether you should itemize or take the standard deduction. These tax preparation platforms will add up which deductions you’re eligible for and determine whether the standard deduction is worth more or less.
To do this for the mortgage interest tax deduction, you’ll need to wait for your lender to send you Form 1098, which will tell you how much interest you paid during the last tax year.
Did You Pay by Points?
Some people who refinanced their mortgages may have done this through the points system. Points represent prepaid interest, so you paid upfront in order to get a lower interest rate throughout the duration of your mortgage.
A single point is worth 1% in interest. So if you have three points, your interest rates would go down by 3%. These points may also be referred to as a loan origination fee, a loan discount, a maximum loan charge, or simply by the term discount points.
Points are typically deducted over the lifespan of the loan. When they’re deducted depends on the length of the loan.
Are Settlement Fees Deductible?
In short, no.
When you pay a number of fees and charges after settling your mortgage refinancing agreement, you can’t deduct these payments.
These include but are not limited to: attorney fees, legal fees, and inspection costs.
You can deduct some expenses when refinancing, but these generally don’t apply to residences.
What About Rental Properties?
There are rules on what you can deduct when it comes to refinancing a mortgage for a rental property.
Any rent you receive from tenants is fully taxable as income. But, on the other hand, any money you spent to generate that income can be deducted from the rental income you earned for that tax year.
So you can deduct interest, points, and any closing costs and fees. This is a huge advantage residential property owners don’t have access to when deciding to refinance. It’s bigger than you might think, as closing costs and settlement fees can run into thousands of dollars.
Make sure you don’t lose out this tax year by claiming the mortgage interest tax deduction!
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