It depends on what the funds from the refinance are used for whether or not you can deduct the Points. IRS
Topic 504 Home Mortgage Points IRS Topic 504 provides in the first two sentences:
The term points is used to describe certain charges paid to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
IRS Topic 504 further provides that points can be deducted ratably if:
Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid. You can deduct the points in full in the year you pay them, if you meet all the following requirements:
- Your main home secures your loan (your main home is the one you live in most of the time).
- Paying points is an established business practice in the area where the loan was made.
- The points paid weren't more than the amount generally charged in that area.
- You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
- The points paid weren't for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
- The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can't have borrowed the funds from your lender or mortgage broker in order to pay the points.
- You use your loan to buy or build your main home.
- The points were computed as a percentage of the principal amount of the mortgage, and
- The amount shows clearly as points on your settlement statement.
You may also be able to deduct (in the year paid) points paid on a loan to improve your main home if you refinance your home mortgage, and you meet tests one through six, above.
IRS Topic 504 goes on to say:
Points that don't meet these requirements may be deducted ratably over the life of the loan. You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees aren't interest and can't be deducted.
To determine whether you can deduct the points in full on your 2020 return or you can spread them out ratably over the life of the mortgage depends on whether or not you meet the requirements listed above. If you qualify to report the full amount in the year paid, you will need to amend your 2020 return. On the other hand, if you do not qualify to deduct in full in the year paid, you will need to spread ratably over the life of the loan. Remember the refinanced funds can only be used to pay the original mortgage and any additional funds taken out must be used to improve your main home.
The points would be deducted as set forth in How to Deduct Points:
How to Deduct Points
As far as filing taxes goes, claiming a tax deduction for mortgage points is a fairly straightforward process. Mortgage points are considered an itemized deduction and are claimed on Schedule A of Form 1040. Here are the specifics:
- Usually, your lender will send you Form 1098, showing how much you paid in mortgage points and mortgage interest
- Transfer this amount to line 10 of Form 1040 Schedule A
- If any of your points were not included on Form 1098, enter the additional amount you paid on line 12 of Form 1040 Schedule A
How to Report Points on My Return.
Mortgage Refinance Tax Deductions
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