How to Deduct a Refinance

Refinancing can save you money on your payments and on taxes.

People choose to refinance their homes in order to alter the time period for repaying the loan or to secure a lower interest rate on their mortgage. When you refinance your home, you can continue to deduct the interest on the portion of the loan that does not exceed the amount owed on the loan being refinanced. For example, if you owe $200,000 on your mortgage but refinance for $220,000, only the interest on the first $200,000 will be deductible. In addition, you can deduct any undeducted points from a prior refinance and discount points paid during the refinance.

Things You'll Need

• Schedule A
• Form 1098

Instructions

1. Divide the number of discount points paid on the refinance by the number of years in the term of the refinance to find the amount you could deduct per year. For example, if you paid $1,000 in discount points and the refinance would be repaid over 10 years, you would divide $1,000 by 10 to find you could deduct $100 each year.

2. Calculate the amount of undeducted discount points from your last refinance, if applicable. These points can be deducted in the year you refinance. For example, if you paid $1,500 in discount points when you refinanced five years ago, but were only able to deduct $500 in points, you would be able to deduct an additional $1,000 for the undeducted points in the year you refinanced.

3. Consult your form 1098 to determine the amount of interest you paid for the year on your refinanced loan. This amount can be found in box 1 of form 1098.

4. Add the result from steps 1, 2 and 3 to calculate your total deduction. For example, if you had $100 in deductible points from the refinance, $1,000 in undeducted points from a previous mortgage and $5,000 in interest, your total deduction would be $6,100.

5. Report the total amount of your deduction on line 10 of your Schedule A, the list of itemized deductions. This amount will be added to your other itemized deductions and subtracted from your taxable income.

References

• IRS: Publication 936
• Mortgage Loan: Mortgage Refinance Tax Deductions and Points

Resources

• IRS: Schedule A
• IRS: Form 1098