Since mortgage rates are at historical lows, refinancing your mortgage may be a proposition. While refinancing, don’t forget to claim the rightful tax deductions. Tax write-offs you should be aware of when refinancing your principal residence:
Deducting Mortgage Interest after Refinancing
Say your mortgage balance is $300,000, and you decide to refinance and take out some cash by signing up for a new $335,000 15-year loan at a significantly lower interest rate. You can use the extra $35,000 from the new mortgage to eliminate credit-card balances, pay off other loans, and cover expenses.
Assuming your home is worth at least $335,000 when you refinance and assuming you paid at least $300,000 to buy the home and make improvements over the years, your new mortgage is considered to have two separate parts for tax purposes.
Part one: has an initial balance of $300,000, which equals the refinanced balance from your old loan. This $300,000 is treated as so-called home-acquisition debt for tax purposes. All the interest on up to $1 million of home-acquisition debt can be written off as an itemized deduction on Schedule A of your Form 1040 (use Line 10). Interest on home-acquisition debt in excess of the $1 million cap is generally nondeductible.
The second part has an initial balance of $35,000, which equals the cash you took out when you refinanced. This $35,000 part is treated as so-called home-equity debt for tax purposes. Interest on up to $100,000 of home-equity debt can also be written off on Schedule A (use Line 10 here too). Interest on home-equity debt in excess of the $100,000 cap is generally nondeductible.
If you are hit with the alternative minimum tax (AMT), you can deduct interest on up to $100,000 of home-equity debt for AMT purposes only to the extent you use the loan proceeds to pay for home improvements.
In our example, you used the $35,000 of home-equity debt proceeds to pay for other stuff, so you won’t get any AMT deduction for the interest paid on the $35,000 part of the new loan.
Say you were charged one point for the privilege of taking out your new $335,000 mortgage. Each point represents 1% of the new loan balance, so the one point you paid cost $3,350 (1% multiplied by $335,000). (Points are also commonly called loan-origination fees.)
To discover how we can help you with tax preparation services, please give us a call at 401.254.0151. We look forward to hearing from you.