Mortgage Refinancing Tax Deductions Every Homeowner Should Know



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Most homeowners refinance their mortgage to be eligible for a lower interest rate, adjust payment terms, or use their home equity.

But you can also take advantage of several tax deductions when refinancing your mortgage. These deductions, which you can claim after refinancing your mortgage, minimize the amount of federal income taxes you owe – and you shouldn’t leave them on the table.

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

What is a refinancing tax deduction?

When filing your tax return, you may have the option of claiming tax deductions and tax incentives… Both options reduce the amount of your taxes, but affect your tax situation in different ways:

  • Tax deductions reduce your taxable income. For example, withholding interest on a mortgage allows you to deduct the interest paid on your mortgage this year from your income, reducing the amount of tax you owe.
  • Tax incentiveson the other hand, ensure that your tax liabilities are reduced against the dollar. For example, if your tax liability is $ 5,000 and you have a $ 1,000 tax credit, applying the tax credit will reduce your liability to $ 4,000.
Tax deduction Tax credit
Featured at the beginning of your return Invented at the end of your return
Reduces your income for tax purposes Directly reduces the amount of your tax debt
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What expenses can I deduct?

When you refinance your mortgageSome expenses may not be taxed and are similar to buying a home. You can already claim some of these deductions by filing a detailed tax return.

Some of the duplicate home purchase or refinancing tax deductions include:

  • Payment of interest on a mortgage
  • Mortgage insurance premiums
  • Mortgage points
  • Rental closing costs

Although you pay the related expenses up front, the deduction reduces your taxable income on your tax return. Tax deductions for mortgage refinancing can apply for your main home, additional home, or rental property.

Good to know: The Tax and Employment Cuts Act of 2017 (TCJA) reduced the tax deductible for a home loan and also doubled the minimum tax deduction required for filing a detailed return.

In most cases, you can only deduct interest payments on the mortgage or cashing refinancing if you are using funds to “buy, build, or substantially improve” your main or second home, according to the IRS.

Another notable change in tax reform is the reduction in the interest deduction on mortgages to $ 750,000 for qualifying mortgage loans that arose after December 15, 2017.

Standard and detailed deductions: what you need to know

Tax reform TCJA has doubled the standard deduction for taxpayers. The status of your application determines the minimum amount of deductions required to receive detailed deductions for Graphic arts your federal tax return on Form 1040.

Here are the standard deductions for tax year 2021:

Submission status Standard hold amount
Single or married, filing separately USD 12,550
Joint registration in marriage USD 25,100
Head of family USD 18,800

In addition to qualifying mortgage costs, some of the detailed deductions include:

  • Charitable contributions
  • Medical and dental expenses
  • State and local income taxes, sales taxes and property taxes
For example: A married couple filing a joint return has $ 4,900 in detailed below-line deductions and $ 30,000 in related tax deductions:
Total deduction of $ 30,000 – standard deduction of $ 25,100 = deduction for items $ 4,900
In this tax situation, it makes sense to detail and deduct the associated mortgage costs.

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

4 refinancing tax deductions you need to know about

Until you can subtract everything mortgage refinancing costsHere are some general takeaways.

Mortgage interest

Withholding interest on a mortgage is the simplest refinancing tax deduction one can qualify for. Your lender will submit a Form 1098 when you have made at least $ 600 in annual interest payments. Interest payments on the original mortgage and any refinancing will count towards your deduction limit.

You can deduct interest payments of up to $ 750,000 on the aggregate mortgage debt for the primary and secondary home. The deduction limit is only $ 375,000 if you are separately married.

Interest payments on a home equity loan may also qualify if you only use the proceeds from the loan to buy, build, or improve a home as collateral.

Note: The deduction limit remains at $ 1 million for “legacy” mortgages that originated on or before December 15, 2017.

Do not miss: How To Get The Best Mortgage Refinance Rate

For interest and term mortgages

BUT interest-term refinancing replaces your interest rate, mortgage term, or both, and leaves your equity intact. Your home must secure a loan so that interest is not taxed.

For refinancing when cashing out

To qualify for a cash refinancing tax deduction, you need to use your existing capital to make capital improvements to the residence that secures your mortgage.

IN house overhaul can help you get additional tax deductions.

Using the loan for other purposes, such as consolidating credit card debt or vacationing, makes the interest non-deductible.

Clue: If you refinance an amount in excess of 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 on the additional income are not deductible.

Learn more: Tax implications for refinancing when cashing out

Discount points

Purchase mortgage points reduces your interest rate in case of early repayment of interest. You usually deduct points over the life of the loan, but you can deduct all expenses in the same tax year that you refinance.

Some basic requirements for a full deduction include:

  • Your primary residence must provide a loan
  • The value of points cannot be more than the total value for your region.
  • You are significantly upgrading your main home
  • Points do not cover various fees or property taxes.

Check IRS requirements to determine if you are eligible for full mortgage credit retention this year.

Rental closing costs

Most rental property closure costs are tax deductible in Table E and do not require a detailed return.

Some of the eligible costs include:

  • Abstracts fees
  • Legal services
  • Entry Fee
  • Title insurance

However, some expenses cannot be deducted if you refinance a rented property… One example is mortgage scores when the loan amount exceeds the original balance.

For example, if you got refinancing investment property with cash payments the value of which has increased, any portion of the credits in excess of the original loan balance cannot be deducted as rental expenses.

What cannot be deducted when refinancing a mortgage

Unfortunately, the mortgage refinance tax deduction does not apply to the cost of closing your primary or secondary home.

You can only deduct the personal expenses associated with the mortgage, which are listed on Form 1098.

These mortgage refinancing fees are tax deductible:

  • Evaluation fee
  • Legal costs
  • Credit report fee
  • Escrow fee
  • Inspection costs
  • Legal services
  • Entry Fee
  • Title insurance

If you are prepaying interest for future tax years at the close of refinancing, you will most likely need to deduct a portion of the payment from future tax returns.

Failure to deduct these fees increases your refinancing costs. IN best refinancing companieshowever, it can minimize your non-deductible costs and help you get better loan terms.

about the author

Josh Patoka

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

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