Mortgage Refinance Tax Deductions Every Homeowner Should Know

Most homeowners refinance their mortgage to qualify for a lower interest rate, adjust their payment terms, or tap into their home equity.

But you can also benefit from several mortgage refinance tax deductions. These deductions, which you can claim after you refinance your mortgage, minimize the amount of federal income taxes you owe — and you shouldn’t leave any on the table.

What is a refinance tax deduction?

When filing your taxes, you may have the opportunity to claim tax deductions and tax credits. Both reduce the amount of taxes you owe but affect your tax situation differently:

• Tax deductions reduce your taxable income. For example, the mortgage interest deduction allows you to deduct the interest paid on your mortgage that year from your income, lowering the amount of tax you owe.
• Tax credits, on the other hand, provide a dollar-for-dollar reduction of your tax liability. For instance, if your tax liability is $5,000 and you have a tax credit of $1,000, applying the tax credit would reduce your liability to $4,000.

What expenses can I deduct?

When you refinance your mortgage, several expenses can be tax-deductible and are similar to purchasing a home. You may already claim some of these deductions if you file an itemized tax return.

Some of the overlapping tax deductions for buying or refinancing a home include:

• Mortgage interest payments
• Mortgage insurance premiums
• Mortgage points
• Rental property closing costs

While you pay for the qualifying expenses upfront, the deduction reduces your taxable income on your tax return. The tax deductions for a mortgage refinance can apply to your primary home, secondary home, or rental property.

Good to know: The Tax Cuts and Jobs Act of 2017 (TCJA) reduced the number of tax-deductible home loan expenses and also doubled the minimum number of deductions to file an itemized return.

In most cases, you can only deduct the interest payments for a mortgage or a cash-out refinance if you use the funds to “buy, build, or substantially improve” your main home or second home, according to the IRS.

Another notable tax reform change is reducing the mortgage interest deduction to $750,000 in qualifying debt for mortgages originating after Dec. 15, 2017.

Standard vs. itemized deductions: What you need to know

The TCJA tax reform doubled the standard deduction for taxpayers. Your filing status determines the minimum amount of deductions you need to claim itemized deductions on Schedule A of your Form 1040 federal tax return.

Here are the standard deduction amounts for the 2021 tax year:

In addition to qualifying mortgage expenses, some of the itemizable deductions include:

• Charitable contributions
• Medical and dental expenses
• State and local income, sales, and property taxes

For example: A married couple filing jointly has $4,900 in “below-the-line” itemized deductions with $30,000 in eligible tax deductions:

 $30,000 total deduction – $25,100 standard deduction = $4,900 itemized deduction

In this tax situation, it makes sense to itemize and deduct the qualifying mortgage expenses.

However, you’ll need to claim the standard deduction if your itemized deductions don’t exceed the standard deduction amount for your filing status.

4 refinance tax deductions you need to know

While you won’t be able to deduct all mortgage refinancing costs, here are several common deductions.

Mortgage interest

The mortgage interest deduction is the easiest of the refinance tax deductions to qualify for. Your lender will send Form 1098 when you make at least $600 in annual interest payments. Interest payments for the original mortgage and any refinance count toward your deduction limit.

You can deduct interest payments for up to $750,000 in combined mortgage debt for a primary and secondary home. The deduction limit is only $375,000 if you’re married and filing separately.

The interest payments for a home equity loan can also qualify if you only use the loan proceeds to buy, build, or improve the house acting as collateral.

Don’t Miss: How to Get the Best Mortgage Refinance Rates

For rate-and-term mortgages

A rate-and-term refinance replaces your interest rate, mortgage term, or both with new terms and leaves your equity intact. Your home must secure the loan for the interest to be tax-deductible.

For cash-out refinances

To qualify for a tax deduction on your cash-out refinance, you’ll need to use your available equity to perform capital improvements on the residence securing your mortgage.

The capital home improvements can help you qualify for additional tax deductions.

Using the loan proceeds for other purposes such as consolidating credit card debt or going on vacation makes the interest non-deductible.

Tip: If you refinance for more than the original mortgage amount, the interest for the excess debt isn’t deductible. For example, if you refinance a new loan for $50,000 more than your original principal, the interest payments for the extra proceeds are non-deductible.

Learn More: Cash-Out Refinance Tax Implications

Discount points

Purchasing mortgage points reduces your interest rate as you prepay interest. Typically you’ll deduct the points over the life of the loan, but you might be able to deduct the entire expense in the same tax year you refinance.

Some basic requirements to claim the full deduction include:

• Your primary residence must secure the loan
• The cost of points can’t be more than the general cost for your area
• You substantially improve your primary home
• The points don’t cover miscellaneous fees or property taxes

Check out the IRS’ requirements to determine if you qualify for a full mortgage points deduction this year.

Rental property closing costs

Most rental property closing costs are tax-deductible on Schedule E and don’t require filing an itemized return.

Some of the eligible costs include:

• Abstract fees
• Legal fees
• Recording fees
• Title insurance

However, some expenses cannot be deducted when you refinance your rental property. One example is mortgage points when the loan amount is larger than the original balance.

For instance, if you took out a cash-out refinance on an investment property that appreciated in value, any portion of the points that exceed the original loan balance can’t be deducted as a rental expense.

What you can’t deduct on a mortgage refinance

Unfortunately, the mortgage refinance tax deduction doesn’t apply to closing costs for your primary or secondary home.

You can only deduct personal mortgage-related expenses that are reported on Form 1098.

These mortgage refinance fees are not tax-deductible:

• Appraisal fees
• Attorney fees
• Credit report fee
• Escrow charges
• Inspection costs
• Legal fees
• Recording fees
• Title insurance

If you prepay interest for future tax years at the refinance closing, you’ll most likely need to deduct a portion of the payment on future tax returns.

Not being able to deduct these fees increases your refinancing costs. The best refinancing companies, however, can minimize your non-deductible expenses and help you qualify for better loan terms.