Deduct Your Refinancing Costs

Deduct Your Refinancing Costs. As the real estate market improves and mortgage rates remain low, many homeowners are considering refinancing their home mortgages. Following are some of the general tax rules for deducting the charges associated with refinancing.

Interest

Interest on a refinanced loan will be deductible to the extent the loan refinances up to $1 million of home acquisition debt, plus up to $100,000 of home equity debt (limits are $500,000/$50,000 for married taxpayers filing separately). Home acquisition debt is a mortgage loan used to buy, build, or substantially improve a first or second home. Home equity debt is generally any other debt secured by a first or second home.

These limits, however, operate separately. For example, if a couple had $300,000 remaining in principal on their original mortgage loan and then refinanced that debt with a new $450,000 mortgage, they would be able to deduct the interest on only $400,000 ($300,000 plus $100,000). Interest on the remaining $50,000 would be nondeductible because that portion is in excess of the combined limits.

Points

Points paid for the refinancing of a loan that does not exceed the above limits are deductible over the life of the loan. However, any points paid in connection with the portion of a mortgage used to finance home improvements may be deductible in the year of the refinancing.

Penalties and Fees

Generally, a prepayment fee paid on the old mortgage is considered a payment of interest on that mortgage and, therefore, is deductible in the year it is paid.

However, other fees, such as those for credit reports, appraisals, and loan origination, are not deductible. •