With mortgage rates hitting record lows and government programs such as the Home Affordable Refinance Program (HARP) 2.0, many Las Vegas homeowners and real estate investors took advantage of the opportunity to refinance the loans on their properties in 2012. However, correctly deducting the costs of a refinance may be a complicated matter requiring professional services from a qualified CPA or tax preparer.
At closing, borrowers typically sign a settlement statement (also known as a HUD-1 or closing statement) that gives a detailed list of refinancing costs. Because settlement statements are usually long and difficult to understand, tax deductible items from these documents are sometimes overlooked. For personal residences, the tax deductible costs may include points and prorated real estate taxes. For rental and commercial properties, settlement statements contain many types of loan fees, prorated association dues and utilities expenses that may be deductible.
Generally, points paid for refinancing are amortized and deducted over the life of the new mortgage. However, if the mortgage is later refinanced or paid off early, the unamortized points may be fully deductible in the year of the payoff or subsequent refinance. For this reason, it is important to carefully track the unamortized balance of points from year to year so a significant deduction is not missed.
There are several special rules. For example, a taxpayer that uses part of the refinanced mortgage proceeds to improve his or her main home and meets other requirements may be able to fully deduct the part of the points related to the improvements in the year of refinance.
Be sure to read our disclaimer and consult with your tax advisor regarding deductions for refinancing costs. For a free no obligation consultation with one of our Las Vegas CPAs, please contact Dustin Wheeler.