HOME REFINANCING – Understanding the Tax Issues

Are you thinking of refinancing your home mortgage? The following are tax rules to keep in mind.

Refinanced home acquisition debt - Any secured debt you use to refinance home acquisition debt will only qualify as home acquisition debt up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to build, or substantially improve (add value, or prolong the useful life) of the home is not home acquisition debt, but it may qualify as home equity debt.

Track "points" - A point is a fee equal to 1% of the loan amount. While you can fully deduct the points you pay when buying your home (if $1 million or less), points paid on refinancing are generally amortized over the term of the new mortgage. The points related to the home improvement are deductible. If you refinance a loan for a second time, the undeducted points from the previous loan are deductible that year, which is also the case when you sell your home.

You can only deduct points on loans secured by your second home over the life of the loan.

 Trace your use of funds - When you "cash out", or convert $100,000 or less of your home equity to cash during a refinance, the interest is tax deductible. If you take additional amounts, the interest may or may not be deductible depending on how the funds are used. When you use funds to expand your business, the interest may be deductible business interest. If you buy investments, the interest may be investment interest expense.


For more information on refinancing or mortgage interest tax deductions, give us a call.