Mortgage Points Deduction After 2nd Refinance

[bigred1821]

I refinanced at the beginning of 2020 to a 20 year loan and paid 0.75 points ($2,707.50) to lower the rate. Now I know that I have to deduct that over the life of the loan ($2707.50 / 20 years = $135.37 per year), but now I am refinancing again in 2021 since the rates have dropped even more. I am now going to a 15 year loan and will have the same payment that I have as I am paying biweekly payments now. My question is how do I go about deducting the the other 19 years worth of points from the 20 year loan? Do I deduct it all on next years taxes since that loan is getting paid off in 2021? Or is it more complicated than that?

[Opus 17]

If you are refinancing with a different lender, you can deduct the remaining points when you pay off the old loan. If you refinance with the same lender, you must add the old points to any new points and spread them out over the new term.

[bigred1821]

Just to confirm, when my new lender pays off my old lender, which should be next month, that is the moment that I can deduct the remainder of the points from the old loan? So that would mean with my Tax Year 2021 taxes, correct?

[Opus 17 · Accepted solution]

Yes, if you are refinancing with a different lender in 2021, the remaining points from the old loan can be deducted in a lump sum on your 2021 tax return.

[bigred1821]

Copy that. Thank you very much.

[atkinsjam]

Hello. I have a question and I hope you can help me as well. Does the IRS explain anywhere about why it has to be a different lender in order to deduct the remaining points from the prior mortgage loan? I can’t figure out how the lender would be relevant as the fees and process is all the same as the prior mortgage is paid off and replaced with a new mortgage. The lender is irrelevant in all cases of refinancing. I’m thinking that the IRS may be referring to a case where the same mortgage is streamlined with the same lender resulting in the same actual account remaining in effect, not a paid off mortgage replaced with a new mortgage. 

Thanks in advance for the help!

[Opus 17]

@atkinsjam 

I can show you the publication and regulations that contain the rules, but I’m not sure I can find anything in writing that explains why the rules exist. Let me explain it as best I can and see if it’s satisfactory to you.

Points are a form of mortgage interest.  To take any tax deduction, you must pay the expense but also, the expense has to have occurred.  This can be seen in the instructions for medical expense deductions. If you pre-pay for a medical procedure, you can’t deduct the entire cost, you can only deduct the proportion of the cost that can be allocated to the portion of the work that has been performed.  (In other words, if you pre-paid for an orthodontics program that will take three years to accomplish, you can only deduct 1/3 of the cost per year even though you pre-paid the entire cost.)

That same principle applies to mortgage interest. Because points are a form of mortgage interest, you can only deduct them when the interest is actually paid.  If you pre-pay the interest, you deduct it over the life of the loan.  (There are, of course, special conditions under which you can deduct the points fully in the year you paid them, but this is the exception to the rule, and not the rule itself.)

Because you are deducting the points over the life of the loan, you can deduct the remaining points when the loan ends (you don’t lose the remaining deduction, because you did pay the points originally).   When you refinance with a new lender, you are closing out and fully paying off the old loan. But when you refinance with your existing lender, there is a gray area; are you closing the loan and making a new loan or are you modifying the existing loan?  Even if it looks like a new loan on paper, is it really just a modification of the existing loan in reality?  I suspect that this is the reason that you can’t deduct the remaining points when you refinance with your original lender; the IRS has made a blanket rule rather than having to look at the specific facts of every single refinance.

[Carl]

Assuming this is for rental property and not your primary residence, here's how to deal with the points from the old loan *if* the new loan is with a different lender.  Then after that is how to enter the points on the new loan so they are deducted over the life of the new loan, and not depreciated.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

ENTERING POINTS

here's how to enter the points in the Assets/Depreciation section.. (does not apply to entering the property itself, or any other property assets.)
- Select the Add and Asset button. (go straight to the asset summary if presented that option)
- Select Intangibles/Other Property, then continue.
- Select Amortizable Intangibles, then continue.
- Describe it as something like "2021 Financing Fees".  Then enter the amount, and the closing date of the loan. Then continue.
- Select "purchased new", then "100% business use", enter the closing date of the loan (again), then continue.
- Code section is 163:Loan Fees, then continue.
- Useful LIfe in Years is the length of the loan, then continue.
- You can "show details" if you like. Then continue, and that does it

[atkinsjam]

Thank you so much for your time answering this. My same thoughts exactly. It definitely appears that the IRS's intent of this rule is to prevent people from deducting the remaining points after a loan modification vice refinance. I read into the old court ruling that this was based on and the court refers to a refi with the same lender as "prolonging the same obligation", consistent with a loan mod. Since refinancing is paying off the old mortgage and replacing it with a completely new loan (new title search, new lender title insurance, new deed, new amount), wouldn't this fall outside of the rule's intent (or in that grey area) since all remaining points from the old loan were paid off by the borrower?

Thanks again for your help and insight. This is certainly tricky and probably up to each taxpayer to apply this rule correctly. 

[Carl]

@atkinsjam you are an add-on to a thread you did not start. It would be highly risky to assume your situation is exactly the same as the originator of this thread. Overall, it would be better to start your own thread and provide the details of your situation. Rental property refi? Primary residence? 2nd home? vacation property? something else you refinanced where the property refinanced also secures the loan?