It costs money to refinance, just like it did when you bought a home. The lender and appropriate third parties provide their services, for which they need to be paid. The costs add up, so many people want to know if they can deduct the closing costs on their tax returns.
We help you explore the answer below.
Deducting Closing Costs
In general, you can’t deduct your closing costs when you refinance a loan. The same is true when you purchase a home. But, the good news is that there are a few expenses you can write off during the year that you refinance as well as the years you own the home.
Whether or not you can deduct closing costs depends on if your deductions exceed the standard deduction. The Tax Cuts and Jobs Act increased the standard deduction to $12,400 and $24,800 for singles and couples respectively. The higher standard deduction makes it the most common way to take tax deductions today since many people don’t have itemized deductions that exceed that amount.
If you do have deductions exceeding this amount, though, you can include the following deductions.
Everyone pays interest on their mortgage. No matter your rate or type of mortgage, you can deduct these expenses on your tax returns. You must meet the following requirements to qualify:
- The home must be your primary or secondary home
- The refinance must be to improve your home
- The loan must be for $750,000 or less
If you have a loan amount higher than $750,000, you may only deduct the interest on the first $750,000. For example, if you have an $850,000 loan, you can’t deduct the interest on the last $100,000.
If you pay points to buy down your interest rate or as a part of your closing fees, you may deduct the points. Remember, points are prepaid interest. The lender collects the points at the closing, rather than over the life of your loan.
Unlike when you buy a home, you can’t deduct the full amount of the points during the year you paid them. With a refinance, you must deduct a portion of the points over the loan’s term. If you took a 30-year term, you can deduct 1/30th of the points each year. If you took a 15-year term, you can deduct 1/15th of the points paid each year.
Real Estate Taxes
Just as when you bought your home, you can write off at least a portion of your real estate taxes. The Tax Cuts and Jobs Act states that you can write off up to $10,000 in real estate taxes paid per year. This continues to be possible even after you refinance your mortgage.
Other Closing Fees
Any other closing fees you pay to refinance your loan cannot be deducted. This includes any fees paid to lenders or third parties, such as appraisers, attorneys, or title companies. Keep this in mind as you shop for a lender. Try to find a loan with the least amount of fees to help keep your costs down and to make refinancing make sense.
Always talk to your tax advisor when deciding whether you can write off certain expenses on your tax returns. Typically, just the interest and points get deducted, and as usual, you can still write off your property taxes.