December 29, 2020

One of the biggest tax deductions a taxpayer can have is the interest that they pay on their mortgage loan. Typically, the mortgage interest is tax deductible, meaning that it reduces the total amount of earned income for the tax year. This is only true if the following applies:

  • The loan must be for your primary residence or a second home that is not rented out.
  • The loan must be secured by your home meaning that your home serves as collateral for the loan. If you fail to make payments, the lender can foreclose on the home.
  • You itemize deductions on your tax return. This means that you list all deductible expenses, add them up and deduct them from the total amount of your income.

Mortgage Points

If you paid points when refinancing your mortgage, it may be possible for you to deduct them. Points are prepaid interest that is paid upfront in order to get a lower interest rate during the period when you’re repaying the loan. Points can also go by the following names:

  • Loan origination fee
  • Maximum loan charge
  • Discount points
  • Loan discount

Points are paid as part of a mortgage refinance and usually must be deducted over the life of the loan.

Settlement fees

A mortgage refinancing is settled when a taxpayer signs all their paperwork to officially take out a new loan and pay off the old one. There are a number of fees and charges that may be applied at settlement. Closing costs can also add up or hundreds or thousands of dollars and could include the following:

  • Appraisal fees
  • Attorney fees
  • Inspection cots
  • Legal and recording fees

It is important to know that these costs are typically not deductible in a mortgage refinance if they are for your residence.

Rental Properties

Rent received from tenants on your rental property is considered taxable income and must be reported when you file your taxes. Money that is spent to generate your income from these rental properties can typically be deducted from your rental income. Interest and points paid on a mortgage on rental property, closing costs and fees can also be deducted on your tax return.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.