Many homeowners today ask are mortgage refinance closing costs deductible? This is one of the most common questions asked when choosing to refinance their mortgage because of the very low interest rates that continue to hover in the 3% range as of this writing.

Refinancing a mortgage on your home property can save you hundreds of dollars per month, freeing up money for many other expenses of life. Also, some of the expenses of owning a home loan and refinancing a mortgage are tax deductible.

We anticipate some possible changes with respect to mortgage interest, closing costs and lending fee deductions, but we will have to wait and see which version of the tax reform bill will get passed.

What Mortgage Refinance Fees and Closing Costs Are Still Tax Deductible?

refinance tax deductionFor example, for taxpayers who itemize, you can usually tax deduct the interest that you pay both on your mortgages, both for your own residence and any investment properties you own.

A common question, though, is what about closing costs? Is the mortgage refinance tax deductible?

We will address this important question below, as well as provide helpful information about other ways to reduce your tax obligations with your home and mortgage.

Are Closing Costs on Primary Residence Tax Deductible?

One of the most common questions we get is, ‘Are closing costs tax deductible?” In the majority of instances, the response is no.

The sole mortgage closing expenses that you can potentially declare on your tax return for the fiscal year in which you acquire a home include any points you disburse to lower your interest rate and the initial real estate taxes you might remit.

Unfortunately, in most cases you cannot tax deduct your closing costs on your refinance mortgage for your personal residence. In the past borrowers were able to deduct refinance costs for tax purposes. If you are looking for safe refinance tax deductions then keep reading. Common closing cost expenses include:

  • Appraisal fees
  • Loan preparation fees
  • Title insurance fees
  • Attorney and notary fees

However, one exception is if your property that is being refinanced is an investment property. In that case, you may be able to tax deduct some of your closing costs; it is important to consult with your CPA to ensure that what you want to do is allowable under IRS laws.

Points Are Normally Tax Deductible

While you are usually out of luck to tax deduct your closing costs, you can usually tax deduct any points that you paid on your mortgage refinance. Points are paid in most cases so that you can get a lower interest rate. In some cases, you may pay several thousand dollars in points, so this is a significant deduction on your taxes.

To itemize the point deductions, you need to use Schedule A on your 1040 return. In many cases, the IRS will require you to tax deduct the points over the loan’s life, whether it is 15 or 30 years.

If you are using the money from a refinance mortgage program to pay for some improvements to your house, some of the points that you paid may be fully deductible in whatever year you took them.

However, the improvements need to add some value to the home. IRS guidelines also state that you need to use your home as collateral for the refinance loan. Also, the paying of points must be a customary practice where you live, and you are not allowed to pay more in points than what the lender normally charges.

Further, you have to use the cash method of accounting to tell the IRS what your income is, as well as what you are deducting. A lender also may not charge you any points to waive any other mortgage loan fees and points that you might pay. Talk with a trusted tax adviser and consider the pros and cons of a refinance with no closing costs or fees.

Before refinancing, we suggest you discuss the tax implications with a tax adviser if you are considering a refinance mortgage that requires mortgage insurance. Learn more about tax deductions with PMI since Congress passed the new law. Many borrowers don’t mind paying origination fees because of the tax deduction. However, if you get a no-closing cost refinance, you won’t reap this benefit.

Is Refinance Mortgage Interest Tax Deductible?

If you secured your mortgage prior to October 13, 1987, you can fully deduct your mortgage interest without any restrictions. For refinance mortgages that were closed between October 13, 1987, and December, 2017, your deduction is constrained to the interest on a principal amount of $1 million ($500,000 if you are married and filing separately). However the revised IRS guidelines for the 2023 tax law regarding mortgage interest, the deduction applies to the initial $750,000 of your mortgage, while married taxpayers who file separately can deduct $375,000 from their respective average mortgage balances.

Mortgage Refinance Tax Deductions on Rental Properties?

As noted earlier, you may be able to tax deduct your closing costs on rental investment properties and second home refinancing. You also may deduct the points that you paid up front. I may save you money to get the facts on investment property refinances. In your capacity as the proprietor of an investment property, you have the opportunity to assert deductions to counterbalance rental revenue and reduce your tax burden. In general, you can deduct eligible rental expenditures (such as mortgage interest, property taxes, interest, and utilities), operational costs, and expenses related to repairs.

Some of the closing costs that you can deduct on your investment property include:

  • Bank fees
  • Title search fees
  • Processing
  • Recording fees

The only thing you have to remember is that these fees have to be prorated over the loan’s life. To determine expenses that you may deduct for this tax year, you need to divide your total closing costs by the number of monthly payments you are going to make on your loan. You then multiply that amount by the payments you made for that tax year.

The rules differ when you’re refinancing a mortgage on a rental property. Rent received from tenants is taxable income and must be reported on your tax return. However, expenses incurred to generate that income can typically be deducted from your rental income. Therefore, you can deduct not only the interest and points paid on a mortgage for a rental property but also all closing costs and fees.

Renovations to Rental Properties

If you do a mortgage refinance on an investment property to improve it, you might be able to take a full tax deduction on the expenses that are related to any improvements in the year the loan was taken out. For instance, let’s assume that you refinance your mortgage for $200,000 and you had $5,000 to close the deal. If you are using $100,000 of your loan money to do renovations on an investment property, you may deduct 50% of your total closing costs, or $2,500 in this case.

Considerations on Tax Deductions and Mortgage Refinances

Below are some other things that you should keep in mind if you are doing a refinance on your property. Before making any financial commitments, make sure today’s pricing is favorable for your goals by checking the mortgage-refinance rates available. There are many other tax considerations that you will want to check out with your tax adviser:

  • The IRS lets you tax deduct mortgage interest up to loans of $1 million on a primary or second home, or on the two together. So, if you have a $500,000 mortgage on your home and a $500,000 mortgage on your second home, you can deduct all of that interest.
  • That mortgage interest tax deduction does not change if you are doing a refinance. You still may deduct all of that interest, if it does not exceed a total mortgage of $1 million.
  • Remember, if you are doing a refinance for cash, the mortgage debt that you take out is only tax deductible if you are improving the home in a significant way. So, if you use those funds to pay off credit card debt, you cannot tax deduct it.
  • Funds that you pull out of your home for a cash-out refinance are not tax deductible, but, you still can deduct the interest on the loan. That is only up to $100,000 in debt for a couple, or $50,000 for one person. Check out the latest rules for home equity tax deductions.

Refinancing a mortgage has many great benefits: You will usually have a lower monthly payment; you can get that long wanted home improvement done; and you may be able to tax deduct interest, points, and closing costs in limited situations. Remember, it is important to always check what you are allowed to do under IRS law.

Consult with your tax professional as these types of mortgage refinance tax deduction situations can get somewhat murky for the layman. But with proper guidance, you should be able to save considerably on your tax bill with a refinance mortgage.