Feature Articles: Taxes
Some Refinancing Costs May Be Deductible
Reviewed and used with special permission from the IRS by: Brenda Procter, M.S., State Specialist & Instructor, Personal Financial Planning, University of Missouri Extension
Taxpayers who take advantage of lower interest rates
to refinance their mortgages may be eligible to deduct
some costs associated with their loans.
Generally, taxpayers who itemize may deduct the
"points" paid on a home mortgage as interest. They may
deduct the points on the mortgage related to a home
purchase or a home improvement in the year paid, but for
other loans - such as a refinanced mortgage - they must
deduct the points over the life of the loan.
To figure the annual deduction amount, divide the
total points paid by the number of payments to be made
over the life of the loan. Usually, this information is
available from the lender. For example, a homeowner who
paid $2,000 in points on a 30-year mortgage (360 monthly
payments) could deduct $5.56 per payment, or a total of
$66.72 for 12 payments. Taxpayers may deduct points only
for those payments actually made in the tax year.
A taxpayer who uses part of the refinanced mortgage
money to pay for improvements to the home, and meets
certain other requirements, may generally deduct the
points associated with the home improvements in the year
paid, spreading out the rest of the points over the life
of the loan.
When refinancing for a second time, or paying off a
loan early, a taxpayer may deduct all the
not-yet-deducted points from the first refinancing when
that loan is paid off.
Other closing costs, such as appraisal fees and
processing fees, generally are not deductible. Taxpayers
with adjusted gross income above $156,400 ($78,200 if
married filing separately) also face limits on the
amount of deductions they can take.
For more information about home mortgage deductions,
see Publication 936, Home Mortgage Interest Deduction at
http://www.irs.gov/pub/irs-pdf/p936.pdf.
Source: IRS News Release Service, IR-2003-127
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Last update: Tuesday, May 05, 2009
