Did you refinance your mortgage? Here’s a tax break | Bedford Hills Real Estate


Refinancing tax deduction basics

You are generally allowed to immediately deduct refinancing points to take out additional mortgage debt used to finance improvements to your principal residence. However, points paid to refinance the remaining balance of the old loan must be amortized over the new loan’s life.

Example 1: Say your old mortgage was $200,000, and you refinanced by taking out a new 15-year $300,000 mortgage. You spent the additional $100,000 of debt to pay for a new den, a kitchen remodel, new landscaping, and assorted other home improvements. You paid 1-1/2 points ($4,500) to get the new loan.

You can immediately deduct one-third ($100,000/$300,000) of the refinancing points, or $1,500, on your 2013 return as long as you paid at least that amount out of your own pocket to get the new loan.

You can claim amortization deductions for the remaining two-thirds ($200,000/$300,000) of the refinancing points, or $3,000, over the new loan’s 15-year term (180 months). So you can deduct $16.67 ($3,000 divided by 180 months) for each month the new loan was outstanding during 2013. In 2014 and beyond, continue claiming amortization deductions of $16.67 a month for as long as the new loan remains outstanding.

Note: If you rolled all the refinancing costs, including the points, into the balance of the new loan, you must amortize the entire amount of the points over the term of the new loan (no immediate deduction in this case).

Example 2: Say you simply refinanced your old mortgage last year without taking on any additional debt. In this case, you can amortize the points over the life of the new loan. For example, if on July 1, 2013 you paid $4,500 in points for a new 15-year mortgage (180 months) with the same principal balance as your old loan, your 2013 amortization deduction is $150 ($4,500 divided by 180 months times 6 months). Your amortization write-offs will continue in 2014 and beyond, at the rate of $25 a month ($300 a year), for as long as the new loan remains outstanding.

Deduct unamortized balance of points from earlier refinancing

Serial refinancers take note: If you had previously refinanced your mortgage and paid points, you probably have a good-sized unamortized (not-yet-deducted) balance for those points. You can deduct that entire unamortized amount when you refinance again.




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