How to Deduct Points When Refinancing
When you refinance, you may pay points either as a closing cost or to lowered the interest rate you pay on the loan. Each point usually costs about 1 percent of the value of your mortgage. The Internal Revenue Service (IRS) allows mortgage holders to deduct the points that they pay when taking out the loan. When you refinance, your points are tax deductible. However, you must deduct them over the life of the loan rather than all at once like you can when you take out a mortgage. To claim the deduction, you must itemize your deductions, meaning you cannot take the standard deduction.
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Instructions
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Determine the amount of points that you paid by consulting Form 1098 that your lender will send you at the end of the calendar year. Box 2 will list the points you paid.
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Divide the number of points you paid by the term of the refinance to determine how much you can deduct each year. For example, if you paid $2,100 in points and the term of the loan is 15 years, you would get $140.
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Write the amount of your deduction on Line 10 of Schedule A, your list of itemized deductions. You should add any mortgage interest that you paid, list it in Box 1 of your Form 1098.
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Total all of your itemized deductions and list the total on Line 40a of your form 1040 tax return.
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Tips & Warnings
If you have refinanced in the past, you can deduct any undeducted points in the year that you refinance. For example, if when you previously refinanced you paid $3,000 in points for a 30-year loan, you would have been able to deduct $100 per year. If you had only had the loan for five years, you would have only been able to deduct $500. When you refinance, you can deduct the remaining $2,500 at that time.
