The critical advantage of refinancing a home is to get a lower interest rate. What follows is the opportunity to raise the monthly cash flow of the household. Another unfamiliar advantage to most people is that when it's also possible to save money on the taxes by deducting some of the costs a homeowner incurs during the refinance. The answer to the ever occurring question “What Can You Deduct on Your Income Tax When You Refinance Your Mortgage?” is that the deductible costs can include points, property taxes paid at closing and points.
The Internal Revenue Service lets people deduct any points that have been paid to lower the mortgage interest rate from the taxable income. It's excellent because one can increase the cash flow in this way. The other aspect to note is that as the refinancing takes place, a homeowner can't deduct the full amount of points in the year of the transaction. Dividing the points evenly over the term of the loan is the only thing possible. Take for example when you paid $1,500 on a 15-year loan, you can deduct $100 every year following the refinancing.
A closer look at some refinancing situations:
People refinance for many various reasons. Look into the situations below and see how the tax refinancing is done and the resulting tax considerations that follow:
1. Straight refinance
This refinancing is based on accessing lower interest rates. Tax deductions are available in the remaining borrowing costs. The costs are spread over five years and in the penalties and exit fees that came from a fixed rate loan.
2. Using equity from your main residence to buy an investment property.
This type of refinancing allows the interest to be deducted because of the loan principal that was applied to acquire income-generating property. Investing in real estate property aside from the current home is also a good idea.
3. Turning the main residence into an investment property and buying a new family home.
Some people can opt for this choice of buying a new home, but not letting go of the old one. In this case, people have paid off their main residence and are ready to move on. To gain a financial step forward, they choose to rent the property out instead of selling it. For them to afford a new home, they opt to access their home equity from the paid-off house. In this case, no tax benefit can be enjoyed. This is because the owned-rental property is already paid off and the interest on the equity amount will not go towards an income-producing asset.
Home refinance for tax deduction is a tricky matter. Deal with it with proper knowledge and understanding. Know the trends and downsides of every refinance transaction. Have a smooth-flowing mortgage refinancing by contacting a trusted financial planner.