Mortgage Refinance Tax Deductions

Mortgage interest tax deduction

With any mortgage—original or refinanced—the biggest tax deduction is usually the interest you pay on the loan. Generally, mortgage interest is tax deductible, meaning you can subtract it from your income, if the following applies:

• The loan is for your primary residence or a second home that you do not rent out
• The loan is secured by your home. This means your home serves as collateral for the loan; if you fail to make your payments, the lender can foreclose on the home
• You "itemize" deductions on your tax return, meaning you list all of your deductible expenses, add them up, and then deduct the total amount from your income. The alternative to itemizing is to take a standard tax deduction, which is a set amount you can claim regardless of your actual expenses. (Learn more about itemizing with "What Are Itemized Tax Deductions?")

When you use TurboTax, it helps you decide which option—itemizing or the standard deduction—will save you more money. At year's end, your mortgage lender sends you a statement, called Form 1098, explaining how much you paid in interest during the year.

Mortgage points paid

If you paid "points" when you refinanced your mortgage, you may be able to deduct them. Points are prepaid interest; you pay them upfront to get a lower interest rate during the period when you're repaying the loan. One point equals 1% of the loan amount, so if you paid 2 points on a $100,000 loan, for example, you would have paid $2,000. Points sometimes go by other names, including:

• Loan origination fee
• Maximum loan charge
• Discount points
• Loan discount

Points paid as part of a mortgage refinance usually must be deducted over the life of the loan. If you refinanced to a 15-year mortgage, for example, then you'd deduct a portion of the points each year for 15 years. This is different from points paid when you first bought the home; points on an original purchase can often be deducted in full in the year they're paid.

Settlement fees not deductible

You "settle" or "close" your mortgage refinancing when you sign all the paperwork to officially take out the new loan and pay off the old one. A number of fees and charges may be applied at settlement. These closing costs can add up to hundreds or thousands of dollars and may include such things as:

• Appraisal fees
• Attorney fees
• Inspection costs
• Legal and recording fees

These costs are generally not deductible in a mortgage refinance if they're for your residence.

Rental properties

The rules are different when you're refinancing the mortgage on a property you use to generate rental income. Rent you receive from tenants is taxable income, and you must report it on your tax return. However, money you spend to generate that income can usually be deducted from your rental income. So you can deduct not only the interest and points paid on a mortgage on rental property, but also all closing costs and fees. (Learn more about tax deductions for rentals with “Rental Property Deductions You Can Take at Tax Time”.)

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