Refinancing is when you swap your current mortgage rate for a lower one with better loan terms, but in reality, you get a new loan to pay for the old one. The new one just happens to be better on your wallet.
This means that interest tax deductions are still available to you on a refinanced mortgage.
What Is A Tax Deduction?
A tax deduction is something that you can subtract against your gross income. Your gross income isn’t the amount that you take home but the amount the government uses to figure out how much tax you need to pay.
For example, if you earn $50,000 a year before taxes, but you were able to subtract a collection of tax deductions worth $5,000, then you will only have to pay taxes on the remaining $45,000.
There are thousands of tax deductions that you can apply for, but in this case, we are talking about refinanced mortgages.
2020 Law Changes Around Refinance Tax Deductions
In 2020 there was a shakeup around tax deductions and mortgage refinancing. Some laws raised the amount you can deduct, while others scrapped schemes altogether.
The laws which affect most people are the Tax Cuts and Jobs Act, which lowered the cap on interest deductions. These interest deductions mostly applied to mortgage loans.
This means that you cannot claim as much as before. If you have noticed a change in your tax deductions, this may be why.
Mortgage Interest Refinance Tax Deduction – Quick Answers
Although the laws have changed, you can still apply for a tax deduction if you fall into these categories:
Your refinanced mortgage loan is for your primary residence.
Your refinanced mortgage loan is for your second home, which you do not rent out.
Your refinanced mortgage loan is secured by your home.
– This means that if you fail to pay your mortgage, the lender can seize your property.
You itemize your tax deductions on your tax returns.
-This means that you create a receipt for all of your expenses and add them up in a traceable fashion; you then deduct the total amount from your income.
If you fall into one or more of these categories, then your mortgage interest is tax deductible.
Mortgage Interest Refinance Tax Deduction – Detailed Answers
One of the biggest tax deductions you can achieve is from mortgage interests. This is true for both original mortgages and refinanced ones. That being said, “cash-out” refinancing follows its own unique rules.
We will discuss regular refinancing and cash-out refinancing, so you don’t miss out on either deduction.
Standard Mortgage Interest Refinance Tax Deductions
Standard rate and term refinances can follow the same rules as the ones found in “Mortgage Interest Refinance Tax Deduction – Quick Answers.” We have placed them below for easy reading.
Your refinanced mortgage loan is for your primary residence.
Your refinanced mortgage loan is for your second home, which you do not rent out.
Your refinanced mortgage loan is secured by your home.
– This means that if you fail to pay your mortgage, the lender can seize your property.
You itemize your tax deductions on your tax returns.
This means that you create a receipt for all of your expenses and add them up in a traceable fashion; you then deduct the total amount from your income.
Cash-Out Mortgage Interest Refinance Deductions
Cash-out refinance mortgages work a little differently from the standard mortgage. You are still allowed to deduct interest, but only on the original balance. You must also use the deduction to improve the value of your home.
The value is considered a capital improvement, which means it is a permanent addition to your home, making it worth more money. Here are some examples of capital improvement:
– Replacing a manual garage door with a remote-controlled one.
– Installing a jacuzzi, swimming pool, or spa in your backyard.
– Installing solar panels.
– Replacing the tiles on your roof.
– Adding another bedroom to your home or building an office.
The suggestions above sound expensive, however, you can add small improvements if the tax duction is small. For example:
– Replacing standard windows with double-glazing or storm windows.
– Installing a home security system.
– Adding central heating.
– Installing an air conditioning unit.
Settlement Fees Are Not Tax Deductible
When you replace your own mortgage with a new one, creating the refinancing chain, you will sign a “settle” or “close” with the old loan. This is because the new loan pays off the old loan.
You will receive a handful of fees and charges for settling your mortgage early, and they can cost you hundreds or even thousands of dollars each. These charges may include, but are not limited to:
– Inspection Costs
– Attorney Fees
– Legal and Recording Fees
– Appraisal Fees
None of the charges in the mortgage refinancing process are tax deductible.
Renting A Refinanced Property
The rules are flipped for primary and secondary homes which you rent out. The money you earn from renting a property is considered taxable income by the IRS. This means some of the costs to keep up the property are now tax deductible.
The tax deductible charges include, but are not limited to:
– Inspection Costs
– Attorney Fees
– Legal Recording Fee
– Appraisal Fees
– Refinance Application Fees
Along with these charges, you can deduct insurance, repairs, and expenses related to your rental property.
Mortgage Points
Mortgage points, also known as discount points, are given to you as an option to buy when you close a loan. The idea is that you can pay off these points to get a lower interest rate on your refinanced mortgage.
No matter what type of property you have, these points are tax deductible.
