Refinancing your home loan can be a great way to save money and take advantage of tax deductions. But it's important to understand the rules and regulations that come with refinancing, as well as the potential impact it can have on your tax returns. Under the current tax law, you can often deduct the full amount of interest you paid on your loan over the past year if you did a standard refinance for a primary or secondary residence. However, insurance payments are not considered tax-deductible.
Additionally, you can't deduct the full cost of discount points you pay at the close of the year when you get your new loan. Instead, you must spread the cost over the total amount of your loan. The IRS publication 936 covers this in more detail. It outlines the limitations on the interest you can deduct when you apply for a cash-out refinance, as well as several ways to apply for refinancing tax deductions. For example, if you use the money from a cash-out refinance to make major improvements to your home, you may be able to deduct your interest.
Additionally, home capital improvements are included in the total amount you spent on the property and can potentially reduce your capital gains tax liability. It's also important to note that cash-out refinances allow you to borrow the capital you've accumulated in your home. However, because this cash is technically a loan that your lender expects you to repay on time, the IRS will not consider it as taxable income. Refinancing won't have a direct impact on your property taxes either, even if you get a new, higher appraisal when refinancing. This is because the local tax authority evaluates property taxes based on its own assessment of the value of the home. Your mortgage appraiser's valuation won't influence that. Finally, improvements and repairs to rental properties are often tax-deductible.
A cash-out refinance doesn't influence the repair costs of a rental property, so you can still apply for these deductions. In conclusion, refinancing your mortgage can be a great way to save money and take advantage of tax deductions. But it's important to understand all of the rules and regulations that come with refinancing so that you can make an informed decision about whether or not it's right for you.
