For mortgage interest to be deductible, the mortgage must be secured by your home, and the proceeds must be used to build, buy or substantially improve your primary residence or second home.
Your lender should report all the interest you pay for the year on IRS Form You can also deduct the mortgage interest you pay with your monthly payments, as well as any late fees you incur. You can even deduct points if the seller pays them, as long as you meet the conditions above.
Your other option is to deduct points over the life of your mortgage. The IRS classifies mortgage origination fees as points. You can deduct your loan origination fees, even if the seller pays them. These are the fees that lenders charge for underwriting and processing your mortgage. The mortgage insurance deduction is constantly phasing out and getting renewed, so check the current law before you claim it.
Mortgage insurance can be paid monthly, in a lump sum at closing or in a lump sum that you finance along with your mortgage. The IRS says that for a lump sum fee, you can deduct the entire amount in the year you close on your mortgage, whether you pay the fee in cash or finance it. This deduction also is subject to income limits. Only mortgage interest and property taxes are potential deductions. That means the following fees are not tax deductible:. Home sellers pay closing costs, too, and these fees can take a major bite out of the sale proceeds.
These amounts are exemptions, which give you much greater tax savings than deductions. Amy Fontinelle is a leading personal finance expert with nearly 15 years of experience. Select Region. United States. United Kingdom. Amy Fontinelle, Mike Cetera. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Property Taxes State and local real estate taxes property taxes are deductible in the year you pay them. Prepaid Interest When you close on your mortgage, you will have to pay interest for a partial month unless you close on the first of the month. The mortgage is being used to buy, build or substantially improve your main home. Whatever your reason is, investigate carefully before deciding. When you refinance whether a personal residence or an investment property , there are costs involved.
The closing costs are expenses that the owner pays to complete the transaction. When buying a property, some closing costs are paid by the seller and some by the buyer, but in a refinance transaction there is no seller. Closing costs often include loan origination fees sometimes called points , appraisal fees, title charges, survey costs, recording fees, and taxes. Most closing costs for the refinance of an investment property are not deductible.
The mortgage interest and property taxes can be deducted, but the rest are added to the cost basis for the asset and are depreciated. If you are depreciating commercial property, the timeline is 39 years. The basis of a property can be adjusted by closing costs and other acquisition expenses and also by improvements.
The refinance costs noted above are added to the cost basis and included in the depreciation. Here is an example:. That is depreciation recapture, since you used depreciation to benefit from the aging of the property while it was appreciating. This material is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You can also fully deduct in the year paid points paid on a loan to improve your main home if you meet tests one through six above.
Points that don't meet these requirements may be deducted ratably over the life of the loan. You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds.
You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees aren't interest and can't be deducted.
Points paid by the seller of a home can't be deducted as interest on the seller's return, but they're a selling expense that will reduce the amount of gain realized. The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence. You can only deduct points you pay on loans secured by your second home over the life of the loan.
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