Do You Have to Show That You Refinanced a Home on Your Taxes?
The Internal Revenue Service (IRS) does not require homeowners to tell it if they refinanced a home. It is usually in the homeowner's best interest to let the IRS know about his mortgage financing because the IRS allows homeowners to deduct certain expenses. The mortgage lender sends IRS Form 1098 to both the IRS and to the homeowner at the end of each year. Information on this helps the IRS know how much of a deduction to expect on the homeowner's taxes.
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Interest
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The IRS allows a homeowner to deduct the amount of interest paid on a mortgage from this taxable income. If the homeowner is in a 25-percent tax bracket, then the homeowner saves $25.00 on his taxes for every $100 spent on mortgage interest payments. The homeowner does not have to claim this deduction if he does not choose to. This deduction also includes interest paid on purchase money mortgages and refinance mortgages. If the homeowner chooses to not claim this deduction, he might have a higher tax bill at the end of the year.
Points
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The IRS allows most homeowners to deduct the cost of origination points and to discount points paid when obtaining a mortgage. The IRS considers these costs as prepaid interest. When a homeowner refinances a loan, the IRS allows the homeowner to deduct the cost of the points over the term of the loan. If the homeowner obtains a 30-year mortgage, then the IRS allows the homeowner to deduct 1/30th of the points paid each year until the loan is paid off. When the loan is paid off early, either through selling the home or refinancing the mortgage, the home owner may deduct all of the remaining points in the same year she paid off the loan. Just like mortgage interest, the homeowner does not have to tell the IRS about the refinance or claim any of the deductions.
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Mortgage Insurance
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The IRS also allows a homeowner to deduct mortgage insurance from his tax bills. This deduction also goes on IRS Form 1098. The homeowner does not have to claim this deduction if she chooses not to. To qualify for the full deduction, the homeowner's adjusted gross income cannot exceed $100,000. This deduction was extended through the 2010 tax year and may be extended into additional years, if Congress chooses.
Capital Gains
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If the homeowner borrowed money to make improvements to the property, she may want to document the improvements made. As of 2011, a homeowner does not pay capital gains tax when she sells a primary residence. Other homes owned by the homeowner, that the homeowner does not live in, may be subject to capital gains. If the homeowner purchases a home for $200,000 and sells it for $400,000, the $200,000 profit may be taxable as capital gains. However, if the homeowner puts $50,000 of improvements in the home, the IRS may only tax the profit minus the cost of the improvements and not the entire $200,000. The borrower does not have to tell the IRS about the improvements or the refinance used to pay for the improvements.
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