Updated on November 11, 2017
Did you refinance your mortgage this year? Are you wondering how that affects your 2017 tax return—and specifically, what refi tax deductions you can take?
You may be familiar with the typical mortgage tax deductions, but is refinancing treated differently than an original mortgage for tax purposes? We’ll break it down in this blog post, answering several FAQs including:
- Are refi closing costs deductible? What about points paid?
- Are there any cash-out refinance tax implications?
- Should I ever not take tax deductions for my refinance?
- How do I claim mortgage refinance tax deductions?
Original vs. refinanced mortgages
A refinanced mortgage is generally eligible for the same tax deductions as an original mortgage. When you refinance, you’re simply taking out a new loan to pay off your existing loan. In the eyes of the IRS, both are – for the most part – simply considered “mortgage loans.”
However, because refinancing allows you to restructure your loan, your refi tax deductions may differ from the deductions on your original loan. We’ll cover those potential differences in the points below.
Deducting home mortgage interest
The juiciest tax deduction for mortgages (both original and refinanced) is typically the interest you paid on the mortgage during the tax year in question. Your mortgage company will provide you with Form 1098, Mortgage Interest Statement.
To deduct mortgage interest, a few conditions must be met:
- Qualified home. The mortgage is for your primary residence or your second home, which is not rented out.
- Secured debt. The home serve as collateral for your mortgage.
- Itemized deductions. You itemize the deductions on your tax return instead of taking the standard deduction.
- Under IRS caps. Current IRS rules allow you to deduct interest on your first $1 million in home purchase debt (e.g., home loan) and $100,000 in home equity debt (e.g., cash-out refinance—see below for more info).
If you have a special situation—like a home under construction or a mortgage over $1 million—this IRS flowchart can help you confirm whether your mortgage interest is fully deductible.
Are mortgage points and closing costs deductible?
If you paid any mortgage points when you refinanced, there’s good news—points are usually deductible. Examples include loan origination fees and prepaid interest.
This is one instance where the tax treatment of original mortgages can differ from refinanced mortgages. Points paid on an original mortgage can often be fully deducted in the year they were paid (the first year of the mortgage). Points paid on a refinance, on the other hand, are generally deducted equally over the life of the loan.
When it comes to closing costs, including fees for appraisals, attorneys, processing and inspections, the news isn’t as rosy. These expenses are generally not deductible.
Are there any cash-out refinance tax implications?
Cash-out refinancing allows you to borrow more than the payoff amount on your original mortgage when you refinance. Depending on the type of cash-out refi, you can use the extra dough for debt consolidation, home improvements or other needs. If you recently did a cash out refi or you’re considering one soon, you may be wondering how it affects your taxes.
Since the money taken out in a cash-out refi is debt, it’s not considered income for tax purposes. In fact, the interest you pay on it is usually deductible, just like the rest of your mortgage interest. Since interest paid on credit cards and other types of loans is typically not deductible, this can be an advantage of using cash-out refi for debt consolidation.
Should I ever not take tax deductions for my refinance?
The only reason you might not claim deductions for mortgage interest and points paid is because you’re taking the standard deduction instead of itemizing. Depending on your situation, the standard deduction could be a better deal for your bottom line.
However, remember that when you refinance, your loan amortization process starts over again—which means your interest payments may have increased vs. what you paid on your original loan the year before (meaning you have more to deduct).
Bottom line? Do the math before you decide. A mortgage tax deduction calculator helps you estimate how much you could save on income taxes by deducting interest payments and points paid.
How to claim refi tax deductions
To claim itemized deductions, you’ll need to file Form 1040 (Individual Income Tax Return) and specify the deductions on its Schedule A. It needs to be a standard Form 1040; Forms 1040EZ and 1040A don’t allow for itemized deductions. To find the total you paid in mortgage interest, refer to the Form 1098 (Mortgage Interest Statement) sent to you by your lender.
As always, check with your tax advisor to find out how these tips apply to your specific situation.
If you haven’t refinanced yet, let Clara be your guide! We offer competitive pricing, a frustration-free online process, and attentive Loan Specialists to answer your questions. You can get started now with a personalized rate quote. If you have any questions, chat with a licensed Loan Specialist.