Did you refinance your home mortgage last year? You can still qualify for often-overlooked deductions

Published: Apr 11, 2019 1:10 p.m. ET

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It’s not too late to claim these on your yet-to-be-filed 2018 taxes

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It’s not too late to claim deductions related to a mortgage refinancing.
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f you refinanced your home mortgage last year, you may be in line for some often-overlooked tax deductions on your yet-to-be-filed 2018 Form 1040. Here’s what you need to know.

Home acquisition debt

You can deduct or amortize points paid to refinance a mortgage that qualifies as home acquisition debt.

However, for 2018-2025, the Tax Cuts and Jobs Act (TCJA) reduced the limit on home acquisition debt to $750,000 or $375,000 if you use married filing separate status. Thankfully, this reduced limit only applies if you refinanced a loan that was taken out after 12/15/17. If you refinance a loan that was taken out on or before that date or one that was subject to a binding contract on or before that date, the new loan is grandfathered. That means the new loan is subject to the prior-law home acquisition debt limit of $1 million or $500,000 if you use married filing separate status.

So if you refinanced an older home acquisition loan, the prior-law $1 million/$500,000 limit still applies, and you can probably treat the entire amount of the refinanced loan as tax-favored home acquisition debt. If so, you can potentially deduct or amortize all the refinancing points

Only itemizers can deduct or amortize home mortgage points

I said potentially because you don’t get any tax benefit from refinancing points unless you itemize. Fewer folks will be itemizing on last year’s return because the TCJA almost doubled the standard deduction amounts. For 2018, the standard deductions are:

* $12,000 for a single taxpayer or $13,600 if you were 65 or older as of 12/31/18

* $24,000 if you and your spouse file jointly; $25,300 if one spouse was 65 or older as of 12/31/18; $26,600 if both spouses were

* $18,000 if you file as a head of household or $19,600 if you were 65 or older as of 12/31/18

These higher standard deduction amounts under the TCJA reduce the odds that you will be able to itemize deductions and gain any tax savings from deducting or amortizing refinancing points.

Deducting refinancing points for those who qualify

Points paid to refinance the remaining balance of your old loan must be amortized over the new loan’s life.

Example 1

Say you refinanced your old mortgage last year without taking on any additional debt. You can amortize the points over the life of the new loan. For instance, say that on 7/1/18 you paid $6,000 in points for a new 15-year mortgage (180 months) with the same principal balance as your old loan. Your 2018 amortization deduction is $200 ($6,000 divided by 180 months times 6 months). Your amortization write-offs will continue in 2019 and beyond, at the rate of $33.33 per month ($400 per year), for as long as the new loan remains outstanding.

You can immediately deduct refinancing points to take out additional mortgage debt that qualifies as home acquisition debt used to finance improvements to your principal residence.

Example 2

Say your old mortgage was $400,000, and you refinanced by taking out a new 15-year $600,000 mortgage. You spent the additional $200,000 of debt to pay for a new den, a kitchen remodel, and assorted other home improvements. You paid 1-1/2 points ($9,000) to get the new loan.

You can immediately deduct one-third ($200,000/$600,000) of the refinancing points, or $3,000, on your 2018 return as long as you paid at least that amount out of your own pocket to get the new loan.

You can claim amortization deductions for the remaining two-thirds ($400,000/$600,000) of the refinancing points, or $6,000, over the new loan’s 15-year term (180 months). So you can deduct $33.33 ($6,000 divided by 180 months) for each month the new loan was outstanding during 2018. In 2019 and beyond, continue claiming amortization deductions of $33.33 per month for as long as the new loan remains outstanding.

Key point: If you rolled all the refinancing costs, including the points, into the balance of the new loan, you must amortize the entire amount of the points over the term of the new loan (no immediate deduction in this case).

Deduct unamortized balance of points from earlier refinancing

Serial refinancers take note: If you had previously refinanced your mortgage and paid points, you probably have a good-sized unamortized (not-yet-deducted) balance for those points. You can deduct that entire unamortized amount when you refinance again.

Example 3: Say the mortgage you refinanced last year was taken out five years earlier in a previous refinancing deal. At that time you paid $4,500 in points for a 30-year loan. You should have $3,750 of unamortized (not-yet-deducted) points left over from the earlier refinancing loan (25/30 of the original $4,500 amount). On your 2018 return, please remember to deduct the $3,750. Please also remember to claim your rightful deductions for points on the new loan, as explained earlier.

If you refinanced and yanked out cash

Say the balance of your old mortgage (incurred when you bought the home) was $325,000 when you refinanced on 7/1/18. On that date, you took out a new 20-year $450,000 mortgage and paid 1 point, or $4,500, for the privilege. You used the $125,000 from the new mortgage to eliminate credit card balances, pay off your car loans, and cover various and sundry other personal outlays.

As far as the IRS is concerned, you now have two separate new mortgages.

* The first $325,000 of the new loan (the balance on your old mortgage when you paid it off) is treated as home acquisition debt. The interest on that amount of the new loan qualifies as an itemizable deduction that you can claim on Schedule A of Form 1040.

* The last $125,000 of the new loan (the excess of the new loan’s $450,000 principal amount over the $325,000 balance of the old mortgage) is treated as home equity debt. For 2018-2025, the TCJA outlaws deductions for interest on home equity debt. Sorry.

Now let’s talk about the points you paid to get the new mortgage. You can amortize the points related to the home acquisition debt part of the new loan ($3,250 in our example) over the life of the new loan. The points related to the home equity debt part of the new loan are nondeductible for 2018-2025.

Finally, as explained earlier, don’t forget to deduct any unamortized points from the mortgage you refinanced.

Where to claim deductions on your return

Claim deductible interest on your new mortgage loan on line 8a of Schedule A (Itemized Deductions) of your 2018 Form 1040. Claim deductions for points paid to obtain the new loan on the same line, assuming they were reported to you on a Form 1098 (Mortgage Interest Statement) received from the lender (they probably were). Deductions for points that were not reported to you on a Form 1098 (somewhat unusual) should be claimed on line 8c of Schedule A.

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