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Tax Deductions for Refinancing

Tax deductions for Refinancing

The major benefit that any mortgage loan will give you as a homeowner is the advantage of tax deductions. Be it a primary mortgage, a second mortgage or a mortgage that you have refinanced, the tax deductions are yours for the taking! As a homeowner, you get three main kinds of tax deductions with your mortgage:

  1. Tax deductible mortgage interest payments
  2. Property Taxes
  3. Points paid on mortgage refinance

These three categories are discussed in detail below.

Tax deductible Mortgage Interest

In most cases, the interest payments on any mortgage are completely tax deductible. The only exceptions occur in cases wherein homeowners want to tap into their home equity to fund other financial needs like college education etc. In these refinancing cases, there is a limit to the interest payments which will be tax deductible i.e., interest on a maximum equity debt of $100,000.

Let’s illustrate the above limitation with an example. Homeowner XYZ had an original mortgage of $125,000. He refinances his mortgage for $300,000. The additional $175,000 is used for buying new cars, vacations and other such discretionary spending. In such a case, the entire interest related to the original $125,000 of the primary mortgage will of course be tax-deductible, and so will $100,000 of the refinanced equity debt. However, there will be no tax deductions on the interest payment of the remaining $75,000 which has been refinanced.

Property Taxes

In the year property taxes are paid to the collector of property tax, they are tax deductible. Future real estate taxes cannot be immediately deducted at the time of mortgage, but are deductible in the same financial year that the property tax becomes liable for payment.

Points Paid on refinance mortgage

Usually the points paid on a mortgage –primary or refinanced, are proportionately deducted over the entire tenure of the loan. However, if the refinance is being used for funding home improvements, all the points might be fully deductible in the first year itself. Your tax advisor will be better able to guide you regarding whether you meet the requirements for such a deduction.

So, consult a qualified tax advisor and discuss the specifics of the deductions that you can avail!

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