Did you refinance your mortgage last year? Here’s how that might affect your taxes


With interest rates dropping throughout 2020, mortgage refinancing has become a major way to save money in the midst of the coronavirus pandemic. But those who have taken the initiative need to realize how the choice of refinancing might affect their taxes in terms of deductions.

The Mortgage Bankers Association estimated that lenders created about 7.1 million refinancing loans last year. “The vast majority of owners will not even qualify to take the tax deductions,” said Holden Lewis, a housing and mortgage expert at NerdWallet.

The Tax Cuts and Jobs Act of 2017 finally comes Keep deducting mortgage interest About it, albeit with some changes, after some suggested that the Republican Party might decide to abandon it.

But the Republican tax formation package expanded the standard deduction to $ 12,000 for single files and $ 24,000 for shared proceeds. By expanding the standard deduction, Republican lawmakers have created a high standard for detailing deductions in order to make taxpayers more fiscally reasonable.

And with interest rates currently low, most homeowners will not pay enough interest each year for the discount to be beneficial, unless they have other discounts they can take advantage of, experts say.

As a result, only “a very small subset of homeowners” need to be concerned about how the mortgage interest deduction will change, “Lewis said.

How to change the mortgage interest deduction

The Tax Cuts and Jobs Act narrowed the amount of mortgage debt that interest can be deducted. Before the legislation, homeowners could deduct up to $ 1 million in mortgage debt if the original loan used to buy, build, or improve a home originated between October 1987 and December 2017. (For loans on homes purchased before 1987, the mortgage interest is on The total loan amount can be deducted, depending on eligibility.)

After the tax reform package became law, the mortgage interest deduction limit was lowered. From 2017 onwards, homeowners can deduct up to $ 750,000 in interest from mortgage debt used to buy, build, or improve a home. Homeowners with pre-existing mortgage loans means they can still deduct up to $ 1 million in interest from mortgage debt if they take out the loan before the end of 2017.

From 2017 onwards, homeowners can only deduct interest on up to $ 750,000 in mortgage debt.

So what does all this mean if you refinance last year? If your new loan is under $ 750,000, you are likely in the spotlight. If you just refinance the existing balance [on the loan] “At that time it was less than $ 750,000, and then you get the interest deduction in full,” said Ryan Lucy, a certified public account and executive vice president of Piascik, a Virginia-based accounting firm.

And if your original mortgage was before 2017, you might be able to deduct interest on up to $ 1 million in debt. “For the purposes of knowing the applicable limit ($ 1 million older or newer $ 750,000), refinancing will generally revert to the date of the original loan for the purposes of subtracting mortgage interest,” said Tim Todd, a certified public accountant and member of the American Institute of Certified Public Accountants Financial Literacy Committee.

How was the loan proceeds used?

Many homeowners who used the low rate opportunity last year to make cash refinancing – meaning the equity on the new loan was greater than the original mortgage because they took some of the equity accumulated.

Todd said that if someone refinances more than the original loan, they are subject to new limits established by the 2017 law.

But until then, the additional amount may or may not be deductible. “Now you have to do interest-tracking rules to say what that revenue was used for,” Lucy said.

Internal Revenue Service It states its website Any additional debt that is deducted through refinancing “is not used to purchase, build, or significantly improve a qualifying home is not a debt to buy a home.”

“You have to do interest tracking rules to say what that revenue has been used for.”

– Ryan Lucy, certified public account and executive vice president of Piascik, a Virginia-based accounting firm

Suppose the original balance of the mortgage was $ 450,000, but the borrower refinanced it and withdrew an additional $ 50,000. They may be able to deduct interest up to $ 500,000 in that mortgage debt depending on how they use the money they have spent. If they financed a home renovation, like turning a bedroom into an office, they’d be clear. But if they use it to pay for their kids’ college tuition fees or buy a new car, only the original credit will be eligible for the deduction.

In addition, the IRS clarified that “the new debt will qualify as home tenure debt only up to the amount of the balance of the old mortgage principal immediately before the refinancing.” So if the homeowner cashed out through refinancing and puts himself above the $ 750,000 threshold in effect now, the additional amount may not qualify.

Read more: Did you skip your mortgage payments last year? Here’s what that means for your taxes

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