Common Tax Deductions: Refinancing Mortgage Points

There are many complicated requirements and restrictions that come with this general rule, so consulting with an experienced tax professional like Allan J Rolnick in Forest Hills, New York is important. He can help you be sure that you are taking the entire deduction as you are entitled to do as a mortgage-paying homeowner.

What are Mortgage Points?

Mortgages often deal in interest rates and points. Points are the same as one percent of the total loan amount. Generally, points are added in addition to your interest amount. There are two type of points, and the difference is important for tax purposes.

• Discount  Points: This type of point is actually prepaid interest. The more points that you pay, the lower your interest rate will be. Like interest, this type of point is tax deductible.
• Origination  Points: This type of point is really a charge for the costs of making the loan. It goes directly to the lender like interest, but it may include coverage for things like notary fees, document preparation costs, or inspection fees. These points may be deductible if they were only to obtain the mortgage, and not to pay the other costs associated with closing.

When you take out your first mortgage, you may be able to deduct all of the points that you paid right away. Like mortgage interest, this is an itemized deduction that requires Schedule A and “long” Form 1040.

Refinancing and Mortgage Points

When you refinance your home, you are essentially paying off your old loan and then taking out a new loan. That means that most of the things that you could deduct on your first loan are deductible when you refinance. There is one significant difference, however.

When you refinance, the points must be deducted over the life of the loan instead of all up front. Each year, you deduct a portion of the points for the life of the loan. For example, if you get a 25-year mortgage, you deduct 1/25 of the points you used each year. This is a little bit of a tax disadvantage, but for most people it is not enough to deter them from refinancing their mortgage.

Another interesting twist to refinancing and mortgage points occurs when you pay off the loan. If you pay off the loan early, then all of the unused deductions can be taken during that year. That way, you can still take full advantage of all the deductions available to you, but you get to do it a little bit faster.

Keep in mind, however, that if the points are financed, then they are not deductible as points on your taxes. Instead, you deduct the interest amount as a substitute for dealing with points on your tax return.

Other Requirements for Tax Deductible Interest and Points

Mortgage interest is only tax deductible if the mortgage is on a home that you use as your primary residence or a second home. Your home must also be the collateral for your mortgage—the bank or financing company can foreclose upon it (take it away and sell it) if you fail to pay your mortgage. You are not permitted to rent out this home and deduct interest as an itemized expense. This is because it becomes an investment property when you rent it out.

When you have a rental property, however, you can still deduct the mortgage interest as a business expense. The advantage in that respect is that you can also deduct the refinancing or closing costs as a business expense as well. If you are not renting out the property, closing costs or settlement costs are not deductible as an itemized expense.

A Tax Professional Can Help You with Your Mortgage Points

Mortgage interest and mortgage points can be confusing. Refinancing on your mortgage only adds to the confusion in most circumstances. Get the advice of a knowledgeable tax preparer by contacting Allen J Rolnick. Use the profile link below for more information. You can also call (718) 841-7317 or use the Contact button below to talk to Allen directly.