Can I Fully Deduct Points Paid to Refinance My Home?
Generally, the points you paid to refinance your mortgage are deducted over the term (life) of the new loan.
For Example: If you have a 30 year mortgage, the deduction for any points are spread out over 30 years. So if you had $3,000 in points, divide by 30 to deduct $100 in points each year.
If you refinance your home to make substantial improvements you may be able to fully deduct the portion of points related to the improvement in the year you refinance.
For Example: Your new 20 year mortgage is for $100,000 and you paid $2,000 in points, but $20,000, or 20%, of the mortgage was to add a room. You can deduct 20% of your points, or $400 in the year you refinanced. The remaining $1,600 in points is divided by 20 years, so you can deduct $80 each year.
The following sections expand on the deduction of refinance points.
I refinanced my home and used part of the cash to improve my home, and part of the cash to lower my bills. Can I deduct the points?
If you use part of the refinance proceeds to substantially improve your home and you meet six tests below, you can deduct the portion of the points related to the improvement in the year you paid them.
Substantial improvements – add value to your home, prolong your home’s useful life, or adapt your home to new uses. Costs for building materials, architects fees and design plans, and required building permits are also a part of substantial improvements.
Repairs to keep your home in good condition, such as repainting your home, are not substantial improvements unless you paint as part of a renovation that substantially improves your home.
The six tests to see whether your points are fully deductible for home improvements in the year paid are as follows:
- Your loan is secured by your main home.
- Paying points is established business practice in the area where the loan is made.
- The points paid were not more than the points generally charged in that area.
- You use the cash method of accounting.
- The funds you provided at or before closing, plus any points paid by the seller were at least as much as the points charged.
- The funds you provided do not have to be applied to the points. They can be a down payment, an escrow deposit, earnest money, and other funds paid at or before closing.
- You cannot borrow the funds to pay the points from the lender or broker.
- The points were not paid in place of the amounts that appear separately on the closing statement such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
Proceeds used for anything other than to buy, build, or substantially improve your home, may be qualified as home equity debt and may not be fully deductible in the year the proceeds are received. The amount of debt that can be treated as home equity debt on your main home and second home is limited to the smaller of:
- $100,000 ($50,000 if married filing separately), or
- The total of each home’s fair market value (FMV) reduced by the home acquisition debt.
TurboTax calculates the deductible portion of the points paid in this situation.
For example, you took out a $300,000 loan on your main home and used $100,000 (1/3) for your pool and landscaping. You paid $3,000 in points. You would be able to deduct 1/3 of the points related to the proceeds used for home improvements or $1,000 (3,000/3) in the year you took out the loan.
Yes you can deduct qualified points which are pre-paid interest paid to the lender or broker. Because points are pre-paid interest, you generally deduct them over the term or life of the loan.
For more information see What Can I Deduct In a Mortgage Refinance? and What Can Be Deducted When Refinancing Rental Property?
I refinanced my house and received cash back to pay off a credit card. Do I need to claim this cash as income?
No. These proceeds would be considered home equity debt since they weren't used to buy, build, or substantially improve your home.
If you refinanced with a new lender you may deduct the unamortized points from the old loan in the year you refinance.
For example, you paid $3,000 in points on your original loan and $500 of the points were deducted in prior years. If you refinanced with a new lender, you can deduct the entire $2,500 balance in full in the year you refinance.
If you refinanced with the same lender, on the other hand, you must deduct the unamortized portion of the points from the old loan over the life of the new loan.
For example, you paid $3,000 in points on your original loan and $500 of the points were deducted in prior years. You refinanced with the same lender. Your new loan has a 15 year term and the old one had a 30 year term. You will be able to deduct the remaining balance of $2,500 over the new loan term (15 years). So your deduction for the unamortized balance will be $166.67 ($2,500/15 years). You will be able to deduct the unamortized portion of $166.67 along with any points paid on the new loan amortized over the new loan term.
If your property is a rental, the unamortized points are handled the same way, but they are entered on a different form.