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It is pretty common knowledge that home mortgage interest is deductible. It is less commonly know that some of the costs of refinancing your home are also deductible on your federal income taxes.
The term “points” is used to describe certain charges paid to obtain a home mortgage.
Here are some things to remember when deducting points: Straight from the IRS:
Taxpayers who itemize deductions generally may be able to deduct the points paid to obtain a home mortgage as mortgage interest
Points paid solely to refinance a home mortgage usually must be deducted over the life of the loan
Points can be fully deducted in the year paid if certain tests are met
For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders.
Taxpayers may deduct points only for those payments made in the tax year.
However, if part of the refinanced mortgage money was used to finance improvements to the home and if the taxpayer meets certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid. Also, if a homeowner is refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible in the year it is paid off.
Unfortunately, not all of the costs of your refinance are deductible.
Other closing costs – such as appraisal fees and other non-interest fees – generally are not deductible. Additionally, the amount of your Adjusted Gross Income can affect the amount of deductions that can be taken.
For more information on deductions related to refinancing, visit IRS.gov for Tax Topics 504, Home Mortgage Points, and 505, Interest Expenses. You may also review IRS Publication 936, Home Mortgage Interest Deduction, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Source:
IRS Tax Tip 2008-55
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