Can I Deduct the Points I Pay on Refinancing My Mortgage?
As a reward for paying some of your long-term interest on your mortgage upfront, the IRS allows you to deduct the points you pay on refinancing a mortgage from your income taxes. However, unlike buying a home, in which the points paid may be deducted from your taxes that year, the points paid for refinancing a home must be deducted over the entire life of a mortgage. For example, if you refinance your home, and pay 2 points on a new $300,000 loan, you will have a total of $6,000 to deduct from your taxes over the term of the new loan. This means that if the new loan is to be paid off over 20 years, and you make twelve mortgage payments per year, you would be able to deduct roughly $300 a year for 20 years.
If part of the new loan is used to make home improvements, however, you may qualify for additional deductions associated with these improvements. Even better, these deductions may be made the year you make the improvements in. You may also be able to claim any unused portion of the point deductions if you decide to sell your house, or refinance again. In other words, if after you refinance your home, you decide to sell five years later, you may deduct the unclaimed portion of your original refinance deduction from your taxes that year. In the above example, this would mean that you would have about $4,500 left to deduct.
If you have further questions about how refinancing your home will affect your income taxes, and the types of deductions that may be available to you, you should consult with a tax professional or tax planner.