Taxpayers who refinanced their homes may be eligible to deduct some costs associated with their loans, according to the IRS.
Generally, for taxpayers who itemize, the âpointsâ paid to obtain a home mortgage may be deductible as mortgage interest. Points paid to obtain an original home mortgage can be, depending on circumstances, fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.
For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders. Taxpayers may deduct points only for those payments made in the tax year. For example, a homeowner who paid $2,000 in points and who would make 360 payments on a 30-year mortgage could deduct $5.56 per monthly payment, or a total of $66.72 if he or she made 12 payments in one year.
However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off.
Other closing costs â such as appraisal fees and other non-interest fees â generally are not deductible. Additionally, the amount of Adjusted Gross Income can affect the amount of deductions that can be taken.
For more information on deductions related to refinancing, visit IRS.gov, âFrequently Asked Questionsâ (keyword: refinancing fees) or Tax Topics 504, âHome Mortgage Points,â and 505, âInterest Expenses.â
Other tax information on residential real estate can be found in IRS Publications 936, âHome Mortgage Interest Deduction,â 523, âSelling Your Home,â 527, âResidential Rental Property,â and 530, âTax Information for First-Time Homeowners.â All publications are available on the IRS Web site or by calling 1-800-TAX FORM (1-800-829-3676).
This daily Tax Tip has been provided by the IRS
Note: These tips are provided to help trigger ideas on ways to minimize your tax burden, not as a substitute for professional advice. There is no "one-size-fits-all" answer - each taxpayer's situation is different. You should contact your tax preparer to determine together how this may affect your unique situation.