How is the cost of points on a refinance loan deducted?

How is the cost of points on a refinance loan deducted?

• A. The entire cost can be deducted in the year of refinance
• B. The cost must be evenly spread out over the life of the loan
• C. The cost can be deducted only when the mortgage is paid off
• D. No deduction is allowed for points on a refinance

Answer: (B)

When it comes to refinancing a mortgage, the rules for deducting points (which are essentially prepaid interest) are specific. The cost of points on a refinance loan must be deducted over the life of the loan rather than in the year of the refinance. This means that if you pay points at the time of refinancing, you will not be able to claim the entire amount as a deduction for that tax year. Instead, the total points paid are amortized and deducted proportionately over the term of the new loan. This means that if the refinance has a term of, for example, 30 years, you would take the total points you paid and divide that by 30 to determine how much you can deduct each year. Understanding this amortization approach is important for taxpayers to ensure compliance with tax regulations and to accurately reflect their deductions over time. Therefore, relating to the provided options, the requirement to spread the deduction out over the life of the loan is the correct interpretation regarding the deduction of points on a refinance.

When it comes to refinancing a mortgage, the rules for deducting points (which are essentially prepaid interest) are specific. The cost of points on a refinance loan must be deducted over the life of the loan rather than in the year of the refinance. This means that if you pay points at the time of refinancing, you will not be able to claim the entire amount as a deduction for that tax year.

Instead, the total points paid are amortized and deducted proportionately over the term of the new loan. This means that if the refinance has a term of, for example, 30 years, you would take the total points you paid and divide that by 30 to determine how much you can deduct each year.

Understanding this amortization approach is important for taxpayers to ensure compliance with tax regulations and to accurately reflect their deductions over time. Therefore, relating to the provided options, the requirement to spread the deduction out over the life of the loan is the correct interpretation regarding the deduction of points on a refinance.