Which Refinance Costs Are Tax Deductible?

Refinancing a mortgage can help homeowners secure better interest rates or adjust loan terms, potentially leading to significant financial savings. Understanding which refinancing costs are tax deductible is essential for maximizing these benefits and complying with tax regulations.

Points (Prepaid Interest)

One of the most significant tax-deductible costs when refinancing is the payment of points, also known as prepaid interest. Points are upfront payments to reduce the loan’s interest rate. The IRS allows homeowners to deduct these points incrementally over the life of the loan. For instance, if $3,000 in points is paid on a 30-year mortgage, $100 can be deducted annually. However, if the refinance is used to improve the home, the points may be deductible in the year they are paid.

Per IRS Publication 936, points must be calculated as a percentage of the loan amount and must be customary in the area where the loan is issued. They must also be tied to a loan secured by the primary residence or a second home. Points cannot be deducted if they are paid for services like appraisals or title insurance. For second homes or investment properties, the deductibility of points follows different rules and is often more restricted.

Deductible Mortgage Insurance Premiums

Mortgage insurance premiums may be deductible for those who itemize their tax returns, subject to income limitations. This deduction phases out for taxpayers with an adjusted gross income (AGI) exceeding $100,000 and is unavailable once AGI surpasses $109,000.

Homeowners should ensure these premiums are reported on Form 1098, which outlines mortgage interest and premiums paid during the year. It’s important to differentiate between private mortgage insurance (PMI) and government-backed insurance programs like FHA or VA loans, as deductibility rules may vary.

Settlement Fees That Are Not Deductible

Many settlement fees incurred during refinancing are not tax deductible. These include appraisal fees, which determine the property’s value, and title insurance costs, which protect against ownership disputes. Such fees are classified as personal expenses and are unrelated to loan interest or principal.

Similarly, loan origination charges, such as underwriting or processing fees, are non-deductible. These expenses cover administrative tasks and are not considered interest payments by the IRS.

Real Property Taxes During Refinance

Real property taxes paid at closing during a refinance may be deductible if they meet specific conditions. These taxes, often prepaid to cover the upcoming tax period, must be assessed uniformly at a local level and benefit the general public. Taxes related to improvements like sidewalks or sewers are not deductible.

To ensure accuracy, homeowners should maintain clear documentation of these payments, typically reported on their annual tax return via Form 1098. Only taxes paid at closing—not delinquent taxes—qualify for deduction.