Serial refinancers: Beware tax pitfalls on points
-- Page 2
By Kay
Bell • Bankrate.com
The IRS says you can deduct any remaining balance
of the points in the year the mortgage ends, either due to a prepayment,
refinancing, foreclosure or similar event. Say our hypothetical refinancer
got his loan three years ago. He deducted $50 in points on his last
three tax returns. Now he refinances again at an even-lower rate.
Since the first refi is paid off via the second refi, he probably
can deduct the remaining $1,350 in points on his next tax return.
If the second refinancing is with the same lender,
however, the homeowner loses the immediate deduction of the previous
refi's points that he had been amortizing. In these cases, the IRS
says you cannot immediately deduct any remaining balance of your
first refi's points. Instead, the remaining points balance from
the first refi is added to your new refinance amount. You then continue
to deduct them, along with any points from the second refi, for
the life of your new loan.
Misselbeck cites a 1975 IRS ruling as the basis for
this different treatment of refi loans.
"Essentially, the IRS argues [in the revenue
ruling] that the lending relationship established by the costs of
the initial loan carries a benefit 'purchased' by the loan costs,
with the benefits extending over the period (life) of both loans,"
says Misselbeck.
"By extension, this would be the case on a refinancing
of an existing loan with the current lender."
It's impossible to determine just how many serial
refinancers might miss out on the immediate deduction of previous
loan points.
"It seems, at least in my area, that the last
year or more, there have been fewer instances of points being charged
on refinancings," says Misselbeck. "At least those that
look closely and shop their loans don't pay them.
"I refinanced three times and never paid points,
either at purchase or on the later loans."
But if you didn't get as good a deal and ended up
paying refi loan points, just be sure you know how -- and when --
to deduct
them at tax filing time.
|
Serial refinancing and tax deductions
|
| |
Deducting points from Refi
1 |
Deducting points from Refi
2 |
| First refinance, excess
money used for home improvement* |
Deductible for the portion
related to the excess used for an improvement in the year the
refi loan is taken out; balance deducted over the life of the
loan |
NA |
| First refinance, money NOT
used for home improvement |
Deductible in equal amounts
over the life of the loan |
NA |
| Second refinance, same lender,
excess money used for home improvement* |
Any remainder of points from
Refi 1 are added to any new loan points and deducted in equal
amounts over the life of the new refi |
Portion of points related to
excess are deductible immediately; balance of remaining points
is deductible in equal amounts (combined with earlier remaining
points) over the life of the loan |
| Second refinance, same lender,
excess money NOT used for home improvement |
Any remainder of points from
Refi 1 are added to any new points and deducted in equal amounts
over the life of the new refi |
Deductible in equal amounts
(combined with earlier remaining points) over the life of the
loan |
| Second refinance, different
lender, excess money used for home improvement* |
Any remainder of points from
Refi 1 deductible in year that it is paid off and Refi 2 begins |
Deductible in the year the
refi loan is taken out for the portion related to the excess;
balance of points is deductible in equal amounts over the life
of the loan |
| Second refinance, different
lender, excess money NOT used for home improvement |
Any remainder of points from
Refi 1 deductible in year that it is paid off and Refi 2 begins |
Deductible in equal amounts
over the life of the loan |
| * Excess funds are those amounts
of refinanced mortgage proceeds that are not applied to the
existing mortgage balance. If this money is used to improve
the main home, the portion of points attributable to the "improvement
money" can be deducted in the year paid. The portion of
the points related to the existing mortgage balance, however,
is not eligible for immediate tax-deduction purposes and must
be amortized over the life of the refinanced loan. The same
rules apply to home equity loans or home equity lines of credit. |
|
