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Tax season often brings questions from clients who refinanced their mortgages within the past year.
They already know how refinancing can benefit them, like lowering their monthly mortgage payment or accessing valuable equity through a cash-out refinance.
But as the new tax season approaches, they wonder if it also carries tax implications.
In this article, we’ll break down the key connections between refinancing and the tax season.
From deductible expenses to understanding how changes in mortgage interest deductions may affect your return, these insights can help you maximize your financial benefits.
Refinance your mortgage with MIDFLORIDA Credit Union.
Let’s start with the basics of refinancing
When you refinance, you're replacing your existing mortgage with a new one to secure a lower interest rate, adjust the loan term, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
In some cases, homeowners opt for a cash-out refinance. This allows them to borrow against the equity in exchange for a lump sum of cash to cover expenses such as home improvements or debt consolidation.
Tax-deductible refinancing expenses
Certain costs and fees associated with refinancing a mortgage may be tax-deductible, depending on the purpose of the loan and its structure.
Let’s break down the items that might be deductible.
Mortgage interest
Mortgage interest is often the most significant deduction for homeowners.
If you refinanced to reduce your interest rate or adjust the loan term, the interest you pay on the refinanced loan may still be deductible.
However, the IRS limits deductions for mortgage interest on loans—the funds must be used toward buying, building, or substantially improving your home.
For refinanced loans, the key is whether the funds were used for home-related expenses.
For example, if you took a cash-out refinance and used the equity for home improvements, the interest on that portion of the loan may be deductible.
Points paid on the refinance
Points—also known as loan origination fees or discount points—are paid upfront to lower the interest rate on your loan. These may be deductible over the life of the loan.
If the refinance was used to buy or improve your primary home, you could deduct the full amount in the year the loan was finalized.
Property taxes
Property taxes remain deductible under current tax laws, subject to the $10,000 cap for state and local tax (SALT) deductions.
If you rolled unpaid property taxes into your refinancing, those payments could also be deductible.
Cash-out refinancing and taxes
Cash-out refinancing is a way for homeowners to gain access to their home equity and use those funds for various purposes.
However, the tax implications can vary based on how the money is used.
Home improvements
If the funds from a cash-out refinance are used for substantial home improvements, the interest on that portion of the loan is typically tax-deductible.
Substantial improvements include additions, renovations, or upgrades that increase the property’s value or extend its lifespan.
Other uses of cash
If you used the funds for purposes unrelated to your home, such as paying off credit card debt or covering personal expenses, the interest on that portion of the loan is generally not tax-deductible.
Keep detailed records of your expenses; this documentation may be needed when filing your return.
Changes in mortgage interest deduction limits
Although the Tax Cuts and Jobs Act (TCJA) is set to expire at the end of this year, it can still be applied to a 2024 return. TCJA introduced changes that limit the deductibility of mortgage interest.
Under the current law:
- Mortgage interest is deductible for loans up to $750,000 (married couples filing jointly or $375,000 for single filers) for homes purchased or refinanced after December 15, 2017.
- You could deduct the interest on your home equity loans or lines of credit if the funds were put toward buying, building, or substantially improving your home.
For homeowners with larger mortgages or refinanced loans, these changes may affect the size of your deduction.
Non-deductible refinancing costs
While some refinancing expenses are tax-deductible, others are not.
Common non-deductible costs include:
- Appraisal fees
- Title insurance
- Credit report fees
- Home inspections
- Attorney or notary fees
These costs are considered part of the refinancing process but do not directly reduce your taxable income.
Tax documentation to prepare for refinancing
To better ensure a smooth tax filing process and avoid mistakes, gather all relevant documentation related to your refinance.
Key items include:
- Form 1098: This form, provided by your lender, details the amount of mortgage interest paid during the year.
- Settlement statement (CD-1) : This document outlines the terms and costs of your refinance, including points paid, property taxes, and other fees.
- Receipts for home improvements: If you used cash-out funds for renovations, keep receipts to substantiate the expenses and potential interest deductions.
Having these documents ready can help streamline your tax preparation process and minimize errors.
When to consult a tax professional
While many homeowners can navigate refinancing-related tax considerations on their own, consulting a tax professional is often a wise decision.
A tax expert can help you:
- Identify deductible expenses and ensure compliance with IRS rules
- Optimize your tax return to maximize deductions and credits
- Navigate complex situations, such as multiple refinances or mixed-use of cash-out funds
Tax professionals can also help you stay updated on changes to tax laws that may impact your mortgage-related deductions.
Maximize your financial benefits with refinancing
Refinancing your mortgage offers significant financial advantages, from lowering your monthly payments to unlocking equity for important expenses.
However, understanding the tax implications of this option is essential if you want to get the full benefit from your refinance.
By knowing what expenses are deductible, keeping thorough records, and consulting a tax professional when necessary, you can confidently navigate both refinancing and tax season.
Learn how refinancing your mortgage can work for you
There are many options for refinancing a mortgage and many ways home equity can be leveraged for a better financial future.
MIDFLORIDA helps thousands of homeowners annually, and we can guide you toward the best loan solutions available.
Looking to refinance your home? Start your application with MIDFLORIDA today.
