Mortgage Refinance Tax Deductions: What Are They And How Do You Claim Them?

The Tax Cuts and Jobs Act of 2017 had several implications for refinancing. Understanding the new tax rules can help you minimize your tax burden after you refinance your house.

In this article, we’ll talk about some of the deductions you can claim on your federal taxes after a refinance, and how long you can claim them.

What Is A Refinance Tax Deduction?

A deduction is an expense that can lessen your tax burden. You reduce the overall amount of money that you need to pay taxes on when you take a deduction. For example, if you earn $50,000 a year before taxes and you have $5,000 worth of deductions, you’d only pay taxes on $45,000 of your income.

Refinance tax deductions are select deductions you can take after you refinance your mortgage loan. Many of the deductions we’ll discuss also apply to purchasing a home.

If you have any doubt as to whether you qualify for a certain deduction, we recommend speaking with a financial planner or tax professional.

Itemizing Deductions Vs. Standard Deduction

It’s important to keep in mind that most deductions only apply for homeowners who itemize their deductions. This means adding up all the individual deductions you qualify for and deducting them from your taxable income.

You may choose to itemize your deductions or take the standard deduction. The standard deduction is a single deduction that anyone can claim, no questions asked. The standard deductions for 2024 are as follows:

$14,600 for single filers

$29,200 for married couples filing jointly

You can’t deduct things like interest and mortgage points if you take the standard deduction. This rule applies for both primary residence refinances as well as investment property deductions.

Mortgage Interest Deduction

The biggest deduction you’ll usually qualify for is the mortgage interest deduction on both your original loan and refinance. However, special rules apply for deducting interest on a cash-out refinance.

Mortgage Interest For Standard Rate And Term Refinances

First, let’s talk about mortgage interest on a standard rate-and-term refinance. You can deduct any interest paid on your refinanced loan if all of the following conditions apply:

• The loan is for your primary residence or a second home that you don’t rent out.
• For second homes, you can rent out the property and still claim the deduction as long as you stay in the home for more than 14 days or more than 10% of the days when the property would otherwise be available for rent, whichever is longer.
• The lender that finances your home has a lien on your property. This means that if you fall behind on your payments, your lender can seize your property or put your loan into foreclosure.
• You itemize your tax return – we’ll go over more about what that means in a bit.

Cash-Out Refinance Interest Deduction

The rules are a little different if you opt for a cash-out refinance. You may deduct the interest on your original loan balance no matter how much equity you take out of your home. However, for the portion of your balance being added in the cash-out refinance, you may do this only if you use the money to make capital improvements.

Capital Improvements

A capital improvement is any permanent addition you make to your home that increases its value. Some examples of capital home improvements include:

• Installing a remote-controlled garage door where a manual door used to be
• Adding a swimming pool, spa or jacuzzi to your backyard
• Replacing your roof
• Building a home office or adding another bedroom to your home

Capital home improvements don’t have to be expensive. Some examples of smaller capital home improvements include:

• Replacing your windows with storm windows
• Adding a home security system
• Installing a central heating and cooling system

What Doesn’t Count As A Capital Improvement?

Remember that only permanent additions or renovations count as capital home improvements. Repairs and aesthetic changes (like painting a bedroom) don’t count toward the overall value of your property. This means you can’t deduct anything if you use the money to make home repairs or small design changes. You also can’t deduct the interest on your cash-out refinance if you use the money for any other purpose, like paying off credit card debt or taking a vacation.

An Example Of Cash-Out Refinance Interest Deduction

Let’s take a look at an example to illustrate this point.

Let’s say that you have a mortgage with an $80,000 principal balance. You know you want to take out $20,000 of your equity with a cash-out refinance, but you don’t know what you want to spend it on. You have two options: You can add a swimming pool to your backyard or consolidate your credit card debt.

A swimming pool is a capital improvement to your home. This means that you can deduct all the interest on your total loan balance – that’s $100,000 after the refinance. However, you may consolidate your credit card debt but then can only deduct the interest on your original balance – $80,000. This means you can only deduct 80% of the total interest you paid.

Discount Points Deductions

You may have the option to buy discount points when you close on your loan. Discount points reduce your interest rate. Each point costs 1% of your total loan value. For example, if you refinance a loan with a $150,000 principal, each point costs $1,500. You might hear a lender refer to this as “buying down” your interest rate.

Discount points are fully deductible for primary and qualified second homes. You can also deduct discount points on both regular and cash-out refinances. There are exceptions, but points aren’t usually fully deductible in the year you pay for them. Rather, they typically have to be deducted in equal amounts over the life of the loan. Consult a tax advisor about your situation.

Deductions On Closing Costs For A Rental Property

Closing costs are tax-deductible for refinancing rental properties because the money earned is seen as taxable income.

You have a lot more leeway when deducting closing costs and other upkeep expenses for a refinance on a rental property. Some expenses you can claim as deductions on a rental property include:

• Attorneys’ fees
• State-required inspection fees
• Refinance application fees
• Legal and recording fees
• Appraisal fees

In addition, you can also deduct insurance and repair expenses related to a rental property.

How Do You Claim A Refinance On Your Taxes?

You can claim most deductions over the life of your refinance. This means that if you refinance your mortgage to a 15-year term, you must spread your deductions over 15 years of tax returns. Let’s take a look at how this works in practice.

Mortgage Interest

You may deduct the interest paid on your refinanced loan as long as you meet the criteria laid out above. You can claim the deduction every year that you make payments on your loan. However, you can only deduct the interest that you paid during that year.

For example, you might pay $1,000 in interest on your mortgage loan during the 2024 tax year, so you can only deduct $1,000 from your taxes. This means that as your loan gets closer to maturity, you’ll be able to claim less and less in interest deductions because more of your payments go toward the principal.

Form 1098 For Determining Mortgage Interest

Not sure how much money you paid in interest this year? Your mortgage lender will send you a document called Form 1098 at the beginning of each new tax year. This is your Mortgage Interest Statement, and it tells you exactly how much you paid in interest. You don’t need to include a copy of your Form 1098 with your tax return, but your lender is responsible for forwarding the IRS a copy. If you don’t receive a Form 1098 by mail or you have questions about the balance on your statement, contact your lender.

Rocket Mortgage^® clients may also access Form 1098 electronically by logging into their Rocket Account on the first business day of the new year.

Discount Points And Closing Costs

You typically can’t deduct the total amount that you paid at closing the year that you refinance if you buy discount points. Instead, you must spread your deductions over the total course of your loan.

For example, let’s say that you paid $5,000 at closing for discount points. Let’s also say that your refinanced loan has 10 years left on its term. You’d only be able to deduct $500 per year from your federal taxes. However, you can claim this deduction every year until your loan matures.

The same rules apply for closing costs on a rental property refinance. For example, if you spent $15,000 on closing costs for a 15-year refinance, you’d deduct $1,000 a year until your loan matures.

Remember that tax laws can change on a year-to-year basis. If you aren’t sure about the rules for this year, consider speaking to a CPA or other tax professional.

FAQs About Refinance Tax Deductions

Let’s look at some additional questions you may have about refinance tax deductions.

Are refinancing costs tax deductible?

Some of the costs associated with refinancing your mortgage are tax deductible while others are not. Popular tax deductions for a refinance include mortgage interest, discount points and the closing costs on a rental property refinance.

Should I itemize my taxes or take the standard deduction?

Most deductions only apply to homeowners who itemize their deductions. Itemizing could allow you to claim a larger deduction on your taxable income, but it’ll mean adding up and claiming each individual deduction you qualify for. It’s best to weigh your options carefully so you can decide which option saves the most time and money.

Are refinance closing costs tax deductible?

You can’t deduct settlement fees and other closing costs on a primary or secondary home. However, different rules apply for rental properties because the rental income is seen as taxable income and expenses are tax deductible.