Tax season is here and for those of us (all of us) looking for possible deductions on our federal income taxes, there’s plenty of reasons to read on. If you completed a mortgage refinance in 2019, you may be realizing the benefits of lower payments and possibly a lower rate. But did you know that you may be able to claim tax deductions because of your mortgage refinance?
If you think that by itemizing your deductions (listing deductible expenses and adding them up) you’ll be gaining tax savings, then consider the following deductions. (Before doing your taxes, please consult with a tax professional for financial or tax advice.)
Whether it’s your original mortgage or a refinanced one, the largest tax deduction is likely to be your mortgage interest. This deduction includes any interest paid on loans used to purchase, build or significantly improve a primary residence or second home up to $750,000. For a standard mortgage refinance of a primary residence or a second home mortgage loan, you can deduct the interest (again, on a loan up to $750,000) you paid on your loan for every year you make payments on your mortgage. However, the closer you get to paying off your loan, the less interest you can claim as a tax deduction because you are paying more on the principal balance.
When it comes to a cash-out refinance, you may be able to deduct the interest paid on your total loan balance if you use this loan for a capital home improvement. These improvements must be permanent additions that increase your home’s value such as a roof, another room, air conditioning, etc. The IRS does not consider household repairs, small design changes and aesthetic changes as deductible.
However, if medically required, home improvements can be deducted if they DON’T add value to the home. For example, if the improvements cost $50,000, and improved the home's value by $20,000, the homeowner could deduct only $30,000. Income and age factors also apply.
If you don’t know how much you paid in interest in 2019, you should have received your mortgage interest statement (also known as Form 1098) from your home lender that will state the exact figures.
Discount Points on a Mortgage Refinance
Did you pay for discount points when you refinanced your mortgage? If you did, these points may be tax deductible. Discount points are fees paid to lower your interest rate. One discount point costs 1% of your total loan amount. So if you were to refinance with a loan of $50,000 and you paid two points, it would cost you $1,000 (or $500 for each point). Points are generally deducted over the life of the loan. As points are considered interest (pre-paid interest), homeowners may be able to claim their points as part of the $750,000 mortgage interest deduction for the year the points were paid.
Closing Costs on a Rental Property Deduction
While settlement fees are usually not deductible on your primary residence, the rules are just the opposite for a rental property. The Internal Revenue Service (IRS) views this income as taxable and must be reported to the IRS. However, certain associated expenses from a rental property can be claimed as itemized deductions. So you may be able to deduct the interest and points paid on a mortgage on rental property, as well as the closing costs and fees. Again, consult with a tax professional for financial or tax advice.
New American Funding Can Help
Does all this talk about itemizing for a refinance have you thinking about refinancing or owning a new home? Your New American Loan Officer can help. Give them a call today and see what they can do for you and your dreams of homeownership.