Home Refinancing Points Held Currently Deductible

Purchasing or selling a home is the most significant financial transaction many people will ever complete. Thus, it’s not surprising that there are tax ramifications involved—from the deduction for mortgage interest, property taxes, and points, to the possibility of taxable gain when the property is sold.

Less well-known are the tax issues involved when you refinance the mortgage on your principal residence. A recent Tax Court decision dealt with one of these issues when it looked at the deductibility of points paid on refinancing a mortgage and handed the taxpayer a victory.

The case involved a taxpayer, Gary Hurley, who refinanced his mortgage to lower his monthly payment and then used the savings over the next several years to offset the funds he spent to remodel his home. The taxpayer claimed a full deduction for the points paid on the refinancing in the year they were paid. The IRS insisted the deduction had to be spread out over the life of the loan. The IRS position wasn’t surprising given that points paid on a mortgage for your primary residence are fully deductible in the year paid only if in connection with the purchase or improvement of the residence. A refinancing appears to be neither. However, what saved Mr. Hurley’s deduction was that he did the refinancing to free up funds (from the lower monthly payments) to use in making improvements on his residence. The court said it didn’t matter that all of the improvements weren’t completed in the year the points were paid or that the cost of the improvements was more than Mr. Hurley’s monthly savings during the four years before the loan was refinanced again. The key was that the refinancing’s purpose was to provide funds for the home improvements.

If you refinance your home mortgage, the facts of your transaction may not match those of the Hurley case. However, the take-away value from this case is that just as with the original purchase of a home, it’s important to consider all of the tax issues involved with a refinancing (from the potential immediate deduction of any points that are paid to the write-off of any remaining points from previous refinancings). Thus, please let us know when you refinance your mortgage so that we can make sure you’re receiving all of the tax deductions to which you’re entitled. As you would expect, we’re available to answer any questions that you may have.