Rental Property Closing Costs
At a glance: Closing costs for rental properties can be tax-deductible unlike for a personal residence.
Most rental property closing costs are tax-deductible on Schedule E and dont require filing an itemized return.
Some of the eligible costs include:
- Abstract fees
- Recording fees
- Title insurance
However, some expenses cannot be deducted when you refinance your rental property. One example is mortgage points when the loan amount is larger than the original balance.
For instance, if you took out a cash-out refinance on an investment property that appreciated in value, any portion of the points that exceeds the original loan balance cant be deducted as a rental expense.
Are Appraisal Fees Deductible
Generally, appraisal fees will be deductible on your Schedule C or Schedule E if the appraisal is conducted for business reasons. If you are buying or selling a personal property appraisal fees are not deductible. Appraisal fees paid to determine the value of damaged business property are usually deductible.
Points Are Normally Tax Deductible
While you are usually out of luck to tax deduct your closing costs, you can usually tax deduct any points that you paid on your mortgage refinance. Points are paid in most cases so that you can get a lower interest rate. In some cases, you may pay several thousand dollars in points, so this is a significant deduction on your taxes. To itemize the point deductions, you need to use Schedule A on your 1040 return. In many cases, the IRS will require you to tax deduct the points over the loans life, whether it is 15 or 30 years.
If you are using the money from a refinance mortgage program to pay for some improvements to your house, some of the points that you paid may be fully deductible in whatever year you took them. However, the improvements need to add some value to the home. IRS guidelines also state that you need to use your home as collateral for the refinance loan. Also, the paying of points must be a customary practice where you live, and you are not allowed to pay more in points than what the lender normally charges.
Further, you have to use the cash method of accounting to tell the IRS what your income is, as well as what you are deducting. A lender also may not charge you any points to waive any other mortgage loan fees and points that you might pay. Talk with a trusted tax adviser and consider the pros and cons of a refinance with no closing costs or fees.
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Refinance With Assurance Financial
At Assurance Financial, we know our customers are busy. Our licensed loan officers can help you determine whether a refinance makes sense for you and assist you in navigating the process. When you choose to work with us, well bring our experience and knowledge to the process and help you find an optimal deal.
Your Mortgage Interest Deduction Limit
Since the Tax Cuts and Jobs Act took effect, the limit on mortgage interest deductions has decreased. Prior to 2018, the mortgage interest deduction limit was $1 million. Now that the limit has been lowered, taxpayers who are single or married and filing jointly may only deduct up to $750,000 of interest. For married couples who file separately, the limit is now $375,000 each. However, there are certain exceptions to these new rules:
- Grandfathered debt. If you took out a mortgage before October 13, 1987, you can deduct all of the interest that you pay. There is no limit because youve been grandfathered in.
- Home acquisition debt. If you took out a mortgage to purchase a home after October 13, 1987 but before December 16, 2017, you can deduct up to $1 million .
- Home equity debt. If you took out a second mortgage after October 13, 1987 but before December 16, 2017, for any reason other than to build or improve your home , you can deduct interest on mortgage amounts up to $100,000 .
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Tax Deduction On Mortgage Interest
For any mortgage primary or refinanced the largest tax deduction is usually the interest you pay on the loan. In principle, mortgage interest can be tax deductible, which means you can deduct it from your income if the following conditions apply:
- The loan is for a primary residence or second home that you do not rent
- The loan is secured by your home. This means that your home serves as collateral for the loan if you dont make the payment, the lender can close the house
- You position the deductions in your tax return, which means you list all your deductible costs, add them up, and then subtract the total amount from your income. An alternative to the specification is the use of a standard tax deduction, which is a fixed amount that you can apply regardless of actual expenses.
Are Moving Costs Tax Deductible
For most taxpayers, moving expenses are no longer deductible, meaning you can no longer claim this deduction on your federal return. But if you need to amend a previous return prior to tax reform, or if you serve in the active military and meet certain circumstances, you may qualify for a deduction.
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Will Refinancing Make My Property Taxes Go Up
No, refinancing will not have a direct impact on your property taxes even if you get a new, higher appraisal when you refinance. Thats because your property taxes are assessed by your local tax authority based on its own valuation of your homes value. That wont be swayed by your mortgage appraisers valuation.
However, if the lenders appraisal shows that your home is worth much more than your tax authority thinks, that may be a sign that youre living somewhere with rapidly rising property prices. So you may be in for a hike in property taxes next year. But thats solely down to home price inflation.
Does Refinancing Affect Your Taxes
Homeowners may choose to refinance for many reasons. Refinancing could potentially lower your monthly payments, allow you to consolidate debt, speed up the payoff process for your mortgage, eliminate your private mortgage insurance and put more cash in your pocket. If you have equity in your home, you may be able to leverage it through a refinance.
Your home is likely your largest asset and most long-term investment, and refinancing your mortgage may allow you to get the most out of your investment. When you refinance, you can use the cash for:
- Family expenses: Your family expenses may have changed recently if you started a family or your child is heading to college. This may leave you needing more cash each month, and if you choose to refinance, this can help you adapt to these life changes.
- Home improvements: With a cash-out refinance, you can finally tackle those home improvements. No matter whether you want to put a new roof on your home or build an addition, when you refinance, you can free up more cash that can be put toward these renovations.
- Cost of living: Your cost of living may have changed since you purchased your home, particularly if you have taken a new job or your family has grown. Refinancing can make your mortgage more affordable and help you meet your financial obligations.
- Cash in your pocket: You may want more cash in your pocket to put toward investing or saving.
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What Closing Costs Can I Deduct On My Taxes
You can write off some closing costs at tax time. Mortgage closing costs typically range between 2% and 6% of your loan amount. When youre determining what to claim on taxes, it helps to know the IRS rules. Because each persons tax situation may be different, you may want to consult a tax professional for specific guidance.
Tax-deductible closing costs can be written off in three ways:
How To Get Started On Refinancing
The tax implications of a refinance can be complicated. Before you choose to refinance, you may want to discuss your plan with a tax professional and a mortgage loan expert. Follow the steps below to get started on refinancing.
While the refinancing process can initially feel overwhelming, it doesnt have to be. When you choose to work with us at Assurance Financial, we aim to ensure your journey to refinancing your mortgage is easy and stress-free as possible.
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Types Of Mortgage Debt
There are two different kinds of debt.
1. The money you borrow to buy, build or substantially improve your residence is called “acquisition indebtedness” or home acquisition debt.
2. The money you borrow against the equity in your home, or money you take out when you refinance your home for any reason except home improvement, is called “equity indebtedness” or home equity debt.
Tax Deductions For Refinance And Closing Fees
Refinancing your mortgage can be an excellent way to save money on your payments, take cash out of your property, or both. Given all of its benefits, it frequently makes sense to undertake this process. However, it is also important to note that the IRS will typically limit your ability to write off any additional expenses and costs you incur during the process of refinancing your mortgage.
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What Can I Deduct When Refinancing Rental Property
Unlike your primary residence, where you can only deduct qualified points and interest, you can deduct all costs associated with obtaining a new mortgage for your rental property. Typical loan-related expenses include:
- Loan origination and loan assumption fees
- Mortgage insurance premiums
- Appraisal fees
The costs associated with obtaining a mortgage on rental property are amortized over the life of the loan. For example, if it cost you $3,000 to refinance your 30-year mortgage, you’d be able to deduct $100 per year for the next 30 years.
Other refinance-related expenses not directly related to the mortgage may also be deductible. Generally, if the cost is associated with operating the property they’re deducted as expenses, whereas costs associated with purchasing the property are added to the property’s cost basis, which means they get depreciated.
When you enter your rental property information, we’ll ask about all of these things and deduct them according to the rules.
Tax Deductions For Homeowners
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You can get some federal tax breaks for owning a home if itemizing deductions on your 2020 tax return makes financial sense.
But that’s a bigger “if” than it used to be.
Although tax deductions for homeowners can add up to thousands of dollars, claiming them is worth the trouble only if all your itemized deductions exceed the IRS standard deduction.
The standard deduction for the 2020 tax year is:
$24,800 for married couples filing jointly, up $400 from the 2019 tax year.
$12,400 for single filers and married individuals filing separately, up $200 from the prior year.
$18,650 for heads of households, up $300.
To decide whether to itemize, add up homeowners and other tax deductions you qualify for. If the sum is more than the standard deduction, then itemize. If not, take the standard deduction. Here are the tax deductions for homeowners to include in the calculation.
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Mortgage Interest Deduction For Prepaid Interest Points
There are also special rules regarding when you can apply your deduction for prepaid interest points. You may be able to deduct more of your points in the year you bought them. But, generally speaking, you cant deduct the full cost of prepaid points in the year you paid them. Instead, you can deduct a portion of the points each year over the life of the loan.
To determine the amount you can deduct each year, use the following equation:
x Number of mortgage payments made each year
As an example, lets say you bought a house with a 30-year mortgage term and paid $3,400 in points upfront. Here are the steps you would need to complete:
1. Multiple the full term of the loan by 12 to determine what the loan term is in months:
30 x 12 = 360
2. Divide the cost of the points paid by the full term of the loan :
$3,400 ÷ 360 = $9.44
3. Multiply the result by the number of mortgage payments made in the tax year:
$9.44 x 12 = $113.33 deduction each year.
Deduction For Discount Points
Some people pay extra on closing to buy themselves a lower mortgage rate. If you do, youre purchasing discount points. And you used to be able to deduct the full cost of those at the end of the tax year during which you bought them.
But now you must deduct those points pro rata over the lifetime of your loan. So, if you have a 30year loan, youll deduct onethirtieth of the cost each year. With a 15year loan, you deduct onefifteenth of the cost each year.
Also note that if you rolled the cost of discount points into your loan balance, rather than paying upfront, then you cannot deduct that expense separately.
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How Much Of A Tax Deduction Will Closing Costs Be In Closing Costs Are Tax Deductible 2020
Is there a deduction for closing costs for the are these closing costs on your federal income taxes? However, most Americans wont be able to claim any mortgage closing costs they may pay upfront on their tax return in the tax year in which they buy a home. What to claim includes rate and real estate taxes you may pay.
Are Refinance Closing Costs Tax Deductible On Rental Property
There are often good reasons to refinance a rental property. If your equity in the property has increased, you may want to access some of the cash available to leverage by investing in additional assets. Or, perhaps interest rates have declined and you can refinance at a lower cost. Another possibility is to change the length of the loan term. Whatever your reason is, investigate carefully before deciding.
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Do You Have To Deduct Mortgage Points When You Refinance
Mortgage points are also called discount points, a loan discount, a loan origination fee, and a maximum loan charge. If you want to pay your points as a part of a mortgage refinance, you have to deduct those points over the life of a loan. So when you refinance a 15-year mortgage, you divide those points down by 15, and that is what you can deduct.
Closing Costs That Can Be Deducted When You Sell Your Home
Some closing costs may be used to reduce the taxes on selling a house. Theyre added to your basis a measure of the total costs you paid when your home was purchased. These may include:
- Owners title insurance. An owners title insurance policy protects you against prior ownership claims on the property.
- Property taxes. Only applicable if you paid any share of the sellers taxes when you bought your home.
- Title fees when you buy. These costs may include escrow, endorsements and other title search fees.
- Recording fees. Fees charged by a third party for documenting the transaction in public records.
- Survey fees. A service to confirm the propertys boundaries.
- Transfer or stamp taxes. Vary by state, but if you pay them they can be added to the basis.
- Distressed property expenses. If you purchased a home from a distressed seller and paid for any of the following items, you may be able to add them back to your basis:
- Costs of improvements or repairs
- Any back taxes or past due interest paid
- Recording or mortgage fees
- Sales commissions
You wont be able to add these expenses to the basis if the seller paid any of them when you bought your home. Check your closing disclosure to confirm who paid which closing costs to be sure.
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Are Staging Costs Tax Deductible
In summary, the IRS’s position is that Staging costs are a legitimate selling expense for both primary and secondary homes and are therefore tax deductible. However, it is important to note that if a house is staged and then taken off the market before it sells, the staging expenses are not tax deductible.
Mortgage Interest And Itemizing Deductions
Something to keep in mind is that refinancing your mortgage can significantly reduce your total tax deductions. Refinancing to a lower mortgage rate means you’ll be paying less interest, which means you’ll have less mortgage interest to deduct when tax time comes around.
The difference can be substantial. If you’ve been paying 5 percent on a 30-year mortgage loan and refinance to a 15-year fixed-rate mortgage at 3 percent, you’ve suddenly reduced your interest costs by 40 percent.
Refinancing to a shorter term also means that your interest costs will fall more quickly over the years to come as well.
For many borrowers, the mortgage interest deduction is what makes it practical for them to itemize deductions in the first place. So unless your mortgage interest and other deductions exceed what you’d get with the standard deductions , there’s no point in itemizing.
You’ll still likely save money overall by reducing your interest costs, but you don’t want to be surprised at tax time by not being able to take as much of a deduction as you had been expecting.
Confused? Don’t worry – your tax advisor will be happy to help clear things up. The short of it is that refinancing can help you manage your tax liability and can provide opportunities to save money that you may not have realized.
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