How is mortgage refinance tax deduction handled?


Your mortgage refinance tax deduction amortizes over the years. When you buy a house and purchase points (that is, a percent off your loan amount to reduce your rate), the IRS will let you deduct the amount you paid for points upfront from your taxes for the same year. That is, if you bought 1 point on a $400,000 house, you will be eligible to write off $4000 from your taxes for this year.

If you refinance, your mortgage refinance tax deduction will be spread over the amortizing period of the loan. That is, if you buy points when you refinance and your new mortgage is for $300,000 over 15 years, buying 1.5 points will get you $4500 total tax deduction spread over 15 years - thus you will be entitled to $300 mortgage refinance tax deduction every year until the loan amortizes, or you refinance again.

If you refinance again five years later, you may claim the remaining $3000 tax deduction since you are entering another mortgage refinance agreement.

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