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Tax Returns & Closing Costs for Refinancing

When you refinance a mortgage to obtain additional funds for home improvement projects or take advantage of lower interest rates, your new loan is subject to the same tax rules that apply to the original mortgage. As a result, you will not notice any difference in the way you prepare your tax return after refinancing, such as how you report your deductions for mortgage interest and the treatment of your closing costs

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Tax Returns & Closing Costs for Refinancing

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  1. Tax Returns & Closing Costs for Refinancing

  2. When you refinance a mortgage to obtain additional funds for home improvement projects or take advantage of lower interest rates, your new loan is subject to the same tax rules that apply to the original mortgage. As a result, you will not notice any difference in the way you prepare your tax return after refinancing, such as how you report your deductions for mortgage interest and the treatment of your closing costs.

  3. Refinancing Tax Implications Refinancing the original mortgage on your home allows you to claim the same deductions that are available on your original mortgage. However, in order to treat your new mortgage as home acquisition debt, the IRS requires that the new lender take a security interest in the home for which it provides the mortgage. This means that the lender must have an ownership interest that allows it to foreclose on your home in the event you fail to make your monthly payments. Moreover, the home must be an IRS- qualified home. You can have up to two qualified homes; the first is your principal residence and the second is any other personal use property of your choosing.

  4. Nondeductible Closing Costs Just like the closing costs you incur when obtaining your previous mortgage, the IRS never allows you to claim a deduction for closing cost expenses. Instead, you capitalize these costs, meaning that they increase your tax basis. Your tax basis represents your overall investment in the home and is generally equal to the sum of your purchase price, closing costs and the home improvements you make. When you sell the home, the increase in your tax basis for the closing costs will reduce the amount of capital gains you report on your tax return. Typical nondeductible closing costs include abstract of title fees, recording fees, transfer taxes and the cost of hiring an attorney to assist with the closing.

  5. Refinancing Points You don’t treat the points your new lender charges you to refinance as a nondeductible closing cost. Instead, the IRS treats the charge as deductible mortgage interest. However, you cannot claim a deduction for all points in the year you refinance; you must claim the points over the life of the loan in equal amounts. Moreover, you cannot claim a deduction for points or mortgage interest unless you itemize your deductions on Schedule A.

  6. Image: https://artesiantitle.com/ Article: Sources: http://smallbusiness.chron.com/

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