Mortgage Refinance Tax Deductions
When refinancing a mortgage to get a lower interest rate or obtain more favorable loan terms, you're really just taking out a new loan and using the money to pay off your existing home loan. In general, the same tax deductions are available when you're refinancing a mortgage as when you're taking out a mortgage to buy a home.
Key Takeaways
- You can typically deduct mortgage interest if the loan is for your primary residence or a second home if you itemize deductions on your tax return.
- Settlement fees and closing costs for refinancing your primary residence usually aren't deductible.
- Refinancing typically involves taking out a new loan to pay off your existing home loan, and the same tax deductions are generally available as when you take out a mortgage to buy a home.
- If you refinance a mortgage on a rental property, you can deduct the interest, points, and all closing costs and fees from your rental income.
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 the Standard 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.
TurboTax Tip:
When you refinance your mortgage, you generally need to deduct any points you paid over the life of the loan, unlike points paid during the original purchase, which can often be deducted in full 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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