Don’t Miss Out on Time Sensitive Tax Savings for New Homeowners
Closing on a mortgage is a huge milestone—congratulations! Whether you’re settling into your new home or enjoying the benefits of refinancing, now’s the time to make sure you’re prepared for tax season. Your recent mortgage transaction could lead to significant tax savings—if you know what to look for.
This guide breaks down everything you need to know about maximizing your deductions, from points paid to property taxes and pre-paid interest. Some of these savings are time-sensitive, so don’t wait—read on to learn how you can save and make the most of your new mortgage. And don’t forget to share this info with your CPA to get the full benefit!
1. Points Paid on a Home Purchase
If you paid points to lower your interest rate (check Page 2, Section A of your Closing Disclosure), those points may be deductible in the year you paid them. Even if the seller covered the points, you may still qualify. However, fees like application or underwriting charges are not deductible.
2. Points Paid on a Mortgage Refinance
If you refinanced your mortgage, points paid to lower your interest rate (listed in Section A of your Closing Disclosure) can be tax-deductible—but it depends on how the funds were used:
- No home improvements: If your refinance did not involve cash-out or if it did, the funds were NOT used for home improvements, you’ll need to deduct the points gradually over the life of your loan. For instance, if you have a 30-year mortgage, you’d deduct 1/30th of the points each year.
- Cash-out refinance for home improvements: If you took cash out and used it for home improvements, the points paid on the portion used for improvements can be fully deducted in the year they were paid.
For example:
- Let’s say you refinanced a $200,000 mortgage into a $300,000 loan and used $100,000 of the cash-out for home upgrades. In this case, one-third of your points would be fully deductible this year, while the remaining two-thirds would need to be spread out over the life of the loan.
Fees like application, underwriting, or processing charges in this section are not tax-deductible.
3. Property Taxes
Taxes listed on Page 2, Section F of your Closing Disclosure are deductible in the year paid. However, taxes held in escrow (Section G) are only deductible when your lender pays them.
4. Pre-Paid Interest
If you paid “daily interest charges” or pre-paid interest (Page 2, Section F), these are deductible, too. This will show up on your 1098 form from your lender – most likely Ideal Lending LLC.
5. Previous Year Points Not Yet Deducted
Did you refinance an older loan? You might be able to deduct the remaining un-deducted points from that old loan.
When you refinance a mortgage and pay points, you typically deduct those points gradually over the life of the loan. But if you refinance again before fully deducting the original points, the remaining portion becomes immediately deductible in the year of the new refinance.
For example, let’s say you refinanced a mortgage in 2021, and as part of that transaction, you paid $3,000 in points. Since it was a 30-year loan, you’ve been deducting $100 per year ($3,000 ÷ 30 years).
Now, in 2024, you refinance again, which means only $300 of the original points ($100 per year for 2021, 2022, and 2023) have been deducted. The remaining $2,700 can now be fully deducted on your 2024 tax return.
6. Pre-Payment Penalties
If you paid a pre-payment penalty to a previous lender during your refinance, this cost may be deductible.
7. Other Closing Costs
While most closing costs aren’t immediately deductible, they may reduce capital gains taxes when you sell by increasing your property’s tax basis.
Finally, all these tips apply to primary or vacation homes. If this is about an investment property, refer to IRS Publication 527 for specific details.
Frequently Asked Questions (FAQs)
“Do I need to itemize to claim these deductions?”
Yes, mortgage-related deductions are only available if you itemize your deductions on your tax return.
“What happens if I lost my Closing Disclosure?”
Contact your lender for a copy. This document is essential for identifying deductible items.
“Can I deduct points paid for an investment property?”
Investment property rules differ—refer to IRS Publication 527 for details.
Tips for Staying Organized
Preparing for tax season is easier when you stay organized. Here’s how:
- Keep your Closing Disclosure and Form 1098 in a safe, easily accessible location.
- Note any property taxes or pre-paid interest you paid during the year.
- Maintain records of any cash-out refinance uses, especially for home improvements.
- Use digital tools or folders to track tax-related documents for easy access.
If you have any questions about this or need further assistance, we’re here to help! Don’t hesitate to reach out—just give us a call or send us a message.
Share this blog post with your CPA, along with a copy of your Closing Disclosure from your recent loan transaction, so you can take full advantage of all your available tax deductions.
Please note: This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. Consult with a qualified tax advisor for specific advice about your situation. For more information on any of these items, please reference IRS Publication 936.