Understanding Refinance Mortgage Tax Deductions in 2022

Most people who buy a home or refinance an existing mortgage pay closing costs. So, you may wonder if you can tax deduct some of your closing costs on a refinance mortgage in 2022. The good news is you can deduct some of these costs on your taxes on your refinance mortgage!

Some of the closing costs you can tax deduct on a refinance mortgage in the year you pay them are:

  • Points paid on a cash-out refinance for home improvements. If you do a cash-out refinance to lower your interest rate and pull-out cash, the refinance points may be deductible on your taxes. However, you must prove that the cash was used for capital improvements on the home, not simply home repairs. If you use the cash for another purpose besides capital improvements, you cannot deduct the points.
  • FHA mortgage insurance and VA funding costs: Loans that are backed by the US government such as FHA and VA loans usually reduce the risk of the loans by charging you mortgage insurance or funding fees. You may be able to tax deduct upfront mortgage insurance premiums and mortgage insurance premiums paid on a loan backed by FHA.
  • Funding fees you pay for a refinance loan backed by the VA.
  • Guarantee fees charged for a refinance loan backed by the USDA.

Note: If you are using some of the refinance money for a purpose other than a home improvement, any additional points you paid can be deducted throughout the rest of the loan term.

If you have questions about the tax deductions you can take when you do a refinance loan, please talk to your tax advisor.

What Closing Costs Can Homeowners on a Cash Out Refinance Loan Deduct in 2022?

Taking out a mortgage always includes closing costs that can run into the thousands of dollars. But the good news is you may be able to deduct some of your closing costs on a cash-out refinance loan in 2022.

The biggest thing you can tax deduct when you do a cash-out refinance loan are mortgage points. If you paid for points when you did your refi, you might be able to deduct them on that year’s taxes.

Mortgage points are prepaid interest and you pay them upfront to enjoy a lower interest rate when you repay the loan. One point is 1% of the loan amount. So if you are paying 2 points on a $100,000 refinance, you may be able to deduct $2,000 from your income on your next tax return.

However, you may need to deduct the points paid on your refinance over the life of the loan, so talk to your tax advisor on this.

Also remember that you can usually only deduct points on a cash-out refinance if you use the money for capital improvements on the home.

For example, if you take out $25,000 in equity to pay for a kitchen remodel and paid $1,000 in points, you should be able to deduct the $1,000 off your income on your next tax bill.

However, if you used the $25,000 to pay for college tuition, the tax deduction doesn’t apply. The tax deduction also doesn’t apply if the money is used for simple home repairs, such as repairing the HVAC system.

Make sure the money is being used for capital improvements, then you can probably deduct the points off your taxes. Find out how much closing costs are if you refinance your home.

How to Qualify for Mortgage Interest Tax Deduction on A Cash-Out Refinance in 2022

If home renovations are on your mind, you might be considering a cash-out refinance loan to pull out some equity. Many homeowners use a cash-out refinance to pay for home remodeling, which may add value to the home when you sell.

However, there were changes to federal tax laws in 2017 with the Tax Cuts and Jobs Act that you should know about that may affect your tax deductions related to pulling out equity.

First, note that when you take the equity out with the refi, the IRS doesn’t consider it income; they view it as another home loan. So, you don’t need to include the equity as part of your income when you file your taxes.

However, in exchange for this benefit, there are new rules on what you can and can’t deduct when you pull out the equity. While you can use the money for anything you wish, you will need to use the money for home improvements to deduct the loan interest on your taxes.

The IRS states that you need to make some type of home improvement that boosts the value of the home to deduct the interest. The new tax law states you cannot deduct the loan interest if the money is used for anything else.

In the past, you could still deduct the interest if you used the equity to pay off credit cards or go on vacation.

Keep in mind that you need to make capital improvements to the home that increase the value to qualify for the tax deduction.

A basic home repair isn’t a capital improvement. So, for example, repairing the central AC isn’t a capital improvement, but upgrading the AC system to a more energy-efficient model is.

Talk to your tax advisor if you have questions about qualifying for the mortgage interest deduction when you do your cash-out refinance.