Tax Deductions for Refinancing or New Home Purchase

With the real estate market in the slump and interest rates falling, many people are refinancing their homes or buying new ones at bargain prices. If you have taken out a new home loan recently, you can deduct points that you pay on your new loan, and possibly points that you paid in the past on your old home loan.

Closing costs on your loan can add up to thousands of dollars. These costs include points, which are the lender’s one-time charge for transacting the loan. Each point represents 1 percent of the mortgage amount, and the more points you pay up front, the lower the interest rate should be for the life of the loan. If the new loan is to purchase a new home or remodel your old one, those points are deductible in the year you pay them. Look for the deductible amount on your settlement statement.

The rules are different if you refinance. The points you pay to refinance a loan must be spread over the life of the loan. For example, if you refinance with a thirty-year mortgage loan, you can deduct only one-thirtieth of the total points each year.

But here’s an easy tax deduction to miss. If you refinance your mortgage or sell your home, the remaining points you paid on your old mortgage now become fully deductible.

For example: if you paid $3,000 in points when you refinanced with a thirty-year mortgage five years ago, you will have written off $100 in each of those five years. Now that you’ve refinanced again or sold your home, you can deduct the remaining $2,500 on your current tax return.

A tremendous sense of pride comes with owning your own place. Home ownership has many benefits, and tax savings are key among them.

You’ll find many other helpful tax tips in the booklet 150 Ways to Save Taxes Through Life’s Transitions

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