Any points that you pay in the refinancing of your residence are tax
deductible over the length of the loan in question. The deduction is
allowable only if the residence is your primary home and the new
mortgage replaces a previous one and/or is used to improve the
residence. To the extent that money is taken out to pay off credit
cards and non-residence costs, the points may not be used as a tax
deduction.
Big Deductions By Refinancing Twice
If you refinanced your primary residence twice during 2004, you may be
in for a very nice surprise. A significant tax deduction can be created
when you refinance twice in one year. If you refinance a mortgage, you
accelerate the deductible amount of points from the first mortgage and
may claim the points from the first mortgage all at once.
As an example, assume that I refinanced my home in January 2004 and
paid $3,000 in points. Interest rates continued to drop through 2004
and I then decided to refinance again in August. Because I paid off the
original loan with the refinance, I am able to accelerate the value of
the points of the January loan.
So, what tax deductions have I created for my 2004 filing period?
Initially, I am going to deduct a percentage of the points off of my
latest refinance. The deduction will amount to the total amount of
points paid divided by the total months of the loan. This will not be a
big deduction, but every little bit helps.
In addition to this amount, however, I will also deduct the full $3,000
in points that I paid on my January 2004 refinance! I am able to claim
this deduction because I "accelerated" the deductibility of the points
by paying of January mortgage with the August refinance.
By refinancing twice, I get a lower interest rate and a healthy tax deduction. Ah, the value of owning a home.
