A tax deductible is an expense you can subtract from your taxable income. This deductible expense lowers your taxable income and reduces the amount of taxes owed.

When completing your tax form, you can choose standard or itemized deductions. Filing an itemized tax return allows you to claim mortgage refinance tax deductions which can reduce your federal income taxes.

Are Refinancing Costs Tax Deductible?

Only some refinancing costs are tax deductible, but not all. Here’s a look at what refinancing costs are tax deductible.

Mortgage Interest

The mortgage interest deduction is the biggest deduction you’ll qualify for. You can deduct interest payments for a maximum of $750,000. This applies to combined mortgage debt for a primary and secondary home. If you’re married but filing separately, the deductible limit is $375,000.

Your lender is required to issue Form 1098 after you’ve paid $600 or more in annual interest payments. The deduction limit includes interest payments for the original and refinanced mortgage.

The interest deductible is calculated differently if you take a cash-out refinance. You can still deduct the interest on your original loan balance. The amount of equity you take out of your home will not affect that calculation.

For the balance that you add to the cash-out refinance, you only qualify for a tax deduction if you use the money for capital improvements. This includes any permanent additions you make that increase the value of your home. Adding another bedroom or repairing the roof are capital improvements.

 Discount points

When you close on your mortgage, you may have the option to buy discount points. These points lower the interest rate that you pay on the loan and each point is equal to 1% of the total loan value.

Discount points are fully deductible but not in the year you pay for them. You have to deduct the points over the life of the loan.

Rental Property Closing Costs

Closing costs for a personal residence are not tax-deductible. For rental properties, some closing costs are deductible. This is because rental income is considered as taxable income and expenses are tax-deductible.

Eligible costs include legal fees, title insurance, abstract fees, and recording fees.

What Is Not Tax Deductible on A Mortgage Refinance

These mortgage refinance fees are not tax-deductible:

  • Credit report
  • Appraisal
  • Inspection
  • Recording
  • Attorney
  • Title insurance
  • Legal

Before signing any agreement, ask your lender for advice on minimizing your non-deductible expenses. This can help to keep your refinancing costs down.