Are Refinance Fees & Points Tax Deductible?
- Refinance fees are not allowed to be deducted from your taxes, according to the Internal Revenue Service. These fees include appraisal fees, closing costs and other fees. You also cannot deduct refinance origination points, as these are a type of closing cost rather than a form of prepaid interest.
- Refinance discount points can be deducted from your income taxes, but only over the life of the refinance. Refinance discount points represent money that you pay to receive a lower interest rate on the mortgage refinance. For example, if you pay $7,000 in refinance discount points on a refinance that will last 30 years, you can deduct $233.33 per year on your income taxes (7000 divided by 30).
- The IRS allows you to deduct the interest that you pay on your mortgage refinance on the amount that you owed prior to refinancing. If you refinanced only the amount you previously owed, you can deduct all of the interest, subject to the IRS' maximum of the interest on only the first $1 million ($500,000 if married filing separately) being deductible. For example, if you owed $300,000 and refinanced for $300,000, all the interest would be deductible. Any extra amount refinanced, such as if you perform a cash-out refinance, can only be deducted as home equity debt, which limits the deduction to the interest on the first $100,000 ($50,000 if married filing separately).
- Your lender will send you a Form 1098 at the end of the year to document the costs you paid. Mortgage refinance points and interest are reported on your federal income taxes in the same way as traditional mortgage points and interest. To claim either deduction, you must itemize your deductions, which requires completing Schedule A. You report your mortgage refinance interest on line 10 and your mortgage refinance points paid on line 13 of Schedule A.
