Refinancing can impact your refund

Posted by  on Apr 04, 2014

If you refinanced in 2013 to take advantage of the lowest mortgage rates, you may be hoping to get back some of the money you spent on your refinance in the form of a bigger tax deduction. IRS rules are a little different depending on whether you took out a new mortgage to purchase a home or to refinance your current home loan, and they also vary if the loan is being used to finance a second home or an investment property. Assuming you're not a landlord and you refinanced the mortgage on your primary residence, the IRS regulations are fairly clear.

Refinancing and the mortgage-interest deduction

While there's frequent discussion about adjusting the deduction you get for interest paid on a mortgage, for 2013 tax returns you can deduct all the mortgage interest you paid during the year as long as your loan is less than $1 million. Be careful to make sure that you have received your Form 1098 statement from each of your lenders for 2013 so you can deduct the amount of interest you paid on your earlier mortgage, your refinance, and on any home-equity loans or lines of credit that you're in the process of repaying.

Refinancing and deducting fees or points

When you refinanced, you probably paid multiple fees including attorney fees, bank fees and closing costs. Unfortunately, those fees are not tax deductible on a refinance.

If you paid points to reduce your interest rate, you may be able to deduct some of that expense. A point, equal to one percent of your loan amount, is essentially pre-paid interest that you paid to your lender to obtain your new home loan at a specific rate. These points are not the same as points charged for specific services related to your refinance. Points that qualify for a tax deduction may be identified by a variety of names including discount points, loan origination fees, or a loan discount fee.

Points are treated differently by the IRS depending on whether your mortgage loan was used to purchase or build a home or for refinancing an existing loan. On a refinance, you typically must deduct your points over the life of the loan. For example, if you paid $3,000 in points, you can deduct $100 per year on a 30-year mortgage or $8.33 per month. If you refinanced in August and made four mortgage payments on your new loan in 2013, then you can only deduct $33.33 of your points on your tax return for that year.

Always consult a tax professional to handle your individual tax situation.


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