Are Closing Costs on a Refinance Tax Deductible?

“Closing costs” are fees paid at the end of a mortgage transaction, covering services and expenses related to the new loan. While expenses for an original home purchase might offer immediate tax benefits, rules for refinance closing costs differ significantly.

Understanding Closing Costs and Refinance Deductibility

Closing costs for a mortgage refinance are generally treated differently for tax purposes than an initial home purchase. While some costs may offer tax deductions, immediate, full deductibility is typically uncommon. Eligible costs are often amortized over the loan’s life, while others are not deductible.

For a primary residence, deductible expenses related to a refinance often involve interest, including points. Tax laws distinguish between deductibility for a primary residence and a rental property. When refinancing a rental property, a broader range of closing costs may be deductible, as rental income is taxable, and associated expenses can offset that income.

Specific Deductible Closing Costs

Certain closing costs incurred during a refinance can be tax-deductible, though the timing of the deduction varies. Points, which are prepaid interest, are a notable deductible expense. One point equals one percent of the loan amount. For a refinance, points are generally not fully deductible in the year paid; taxpayers must amortize them over the loan’s life. For example, $3,000 in points on a 30-year refinance could mean approximately $100 per year is deducted.

An exception exists for points paid on a refinance if a portion of the loan proceeds is used for substantial home improvements on the main residence. The portion of points directly related to the improvement may be fully deductible in the year paid, provided certain conditions are met, such as the loan being secured by the main home and points being customary for the area. Any remaining points not attributed to improvements are amortized over the loan term. Prepaid interest, or per diem interest, covering interest accrued from the closing date to the first full mortgage payment, is generally tax-deductible in the year paid. Real estate taxes paid at closing are also deductible in the year they are paid.

Non-Deductible Closing Costs

Many common closing costs for a mortgage refinance are generally not tax deductible for a primary residence. These are considered fees for services or administrative costs, not interest. Examples include appraisal fees, which cover home valuation, and title insurance premiums for both lender’s and owner’s policies are typically not deductible.

Other non-deductible fees often include legal, recording, and notary fees. Loan application, credit report, and underwriting fees, which cover the lender’s processing and risk assessment, are also non-deductible refinance costs for a primary residence. These costs generally increase the home’s basis, affecting capital gains calculations upon sale, but do not provide an immediate tax deduction.

Claiming Your Deductions

Claiming eligible refinance closing cost deductions requires careful reporting on your federal income tax return. Most deductible mortgage interest, including amortized points, is reported on Schedule A (Form 1040), used for itemized deductions. To claim these deductions, taxpayers must itemize rather than taking the standard deduction.

Lenders provide Form 1098, Mortgage Interest Statement, by late January, which reports the total mortgage interest paid during the year, including any points. If a taxpayer pays off or refinances their loan with a different lender, any remaining unamortized points from the previous refinance may be deductible in the year the loan is paid off. Maintaining thorough records, such as the Closing Disclosure, is important to substantiate claims, as it details all fees and charges incurred at closing, providing a clear record for tax purposes.