While refinancing your mortgage can be a wise financial move, understanding the tax ramifications can be like trying to decipher ancient hieroglyphics. Brace yourself—the answer to the frequently asked question, “Can you deduct those pesky closing costs on your taxes?” isn’t as simple as a yes or no.
The Skinny on Closing Costs
Let’s start by dissecting what exactly constitutes “closing costs.” These are the fees associated with finalizing your refinance, typically including:
- Origination fees: Payment to the lender for processing your loan.
- Appraisal fees: Covering the cost of a professional appraisal to determine your home’s value.
- Title insurance: Protecting you against any hidden claims on your property.
- Escrow fees: Handling the disbursement of funds during closing.
- Government recording fees: Filing your new mortgage with the appropriate authorities.
Diving into Deductible Territory
Now, let’s get down to brass tacks: which of these costs can you actually deduct? The answer depends on whether you’re dealing with a primary residence or an investment property
Primary Residence:
- Mortgage Interest: The good news is that you can deduct the interest you paid on the loan used to refinance your primary residence. However, there are some limitations. For example, the interest deduction is capped at the amount of the original loan balance, not any additional cash you took out. Additionally, the deduction phases out for higher income earners.
- Discount Points: These are upfront fees you pay to the lender in exchange for a lower interest rate. You can deduct these points over the life of the loan, but only if you itemize your deductions on your tax return.
- Closing Costs: Unfortunately, most closing costs for a primary residence refinance are not tax-deductible. This includes fees for services like title insurance, appraisals, and escrow.
Investment Property:
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Mortgage Interest: Similar to a primary residence, you can deduct the interest paid on the loan used to refinance your investment property. However, there are no limitations on the amount of interest you can deduct.
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Points: If you itemize your deductions, you can deduct the points you pay on a refinance of an investment property over the course of the loan, just like you can with a primary residence.
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Closing Costs: Here’s where things get interesting. Unlike a primary residence, some closing costs associated with an investment property refinance can be deducted. These include:
- Loan origination fees: The fee charged by the lender for processing your loan.
- Discount points: As mentioned earlier.
- Appraisal fees: The cost of determining the fair market value of your property.
- Title insurance: Protecting you against any hidden claims on the property.
- Legal fees: Costs associated with reviewing loan documents and ensuring legal compliance.
Important Caveat:
It’s crucial to remember that these deductions only apply if you itemize your deductions on your tax return. If you choose the standard deduction, you won’t be able to claim any of these expenses.
Seeking Expert Guidance
Navigating the intricacies of tax deductions can be a daunting task. If you’re unsure about which closing costs you can deduct on your refinance, it’s best to consult with a qualified tax professional. They can analyze your specific situation and provide personalized advice to maximize your tax savings.
Remember, knowledge is power, especially when it comes to your finances. By understanding the nuances of closing cost deductions, you can make informed decisions and potentially save a significant amount of money on your taxes.
What Is A Refinance Tax Deduction?
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Mortgage Interest Deduction
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Tax Deductible Closing Costs
FAQ
What closing costs are tax deductible IRS?
Do you have to pay closing costs when you refinance?
Are closing costs deducted from loan amount?
How does refinancing a home affect your taxes?
Can I deduct closing costs for a mortgage refinance?
You can only deduct closing costs for a mortgage refinance if the costs are considered mortgage interest or real estate taxes. You closing costs are not tax deductible if they are fees for services, like title insurance and appraisals. Mortgage insurance premiums — for contracts issued from 2018 to 2023 but paid in the tax year
Are closing costs tax deductible for refinancing a rental property?
Closing costs are tax-deductible for refinancing rental properties because the money earned is seen as taxable income. You have a lot more leeway when deducting closing costs and other upkeep expenses for a refinance on a rental property. Some expenses you can claim as deductions on a rental property include:
Are refinances tax deductible?
Because of this, a refinance is considered the same as a primary mortgage for tax purposes. This means that the same closing costs – those used to prepay property taxes and those used to buy down your interest rate – are the only ones that can be deducted on your federal income taxes.
How do I deduct mortgage closing costs in TurboTax?
To deduct your mortgage closing costs in TurboTax, go to the Deductions & Credits section of your federal return and select Start next to Mortgage Interest and Refinancing (Form 1098). If you have multiple 1098 forms due to refinancing, ensure they’re first entered correctly. Can I deduct my mortgage interest? Can I deduct mortgage points?