Congratulations on purchasing or refinancing a home loan in 2019! Now that tax season is upon us, you may be wondering about your deductions.
We have uploaded an article that goes in-depth here. This information comes from CMPS Institute.
Use this document, or the abbreviated article below, as a guide to review the items that you were charged that were listed on your closing disclosure when you signed your loan papers at the title company. Using this information will allow you to find the items that are potentially tax deductible. Of course, we also recommend you bring these items to your tax consultant.
We hope you find this information helpful.
Tax Deductible Items for 2019 Mortgages
Points paid on a home purchase in 2019
Points paid on a mortgage refinance in 2019
Property taxes
Prepaid interest
Previous year not yet deducted
Prepayment penalties
Other closing costs
Distinction between a qualified residence and an investment property
NOTE: These items are only deductible if you itemize. They do not apply if you take the standard deduction.
Points paid on a home purchase in 2019
Closing Disclosure Page 2, Section A
If the origination charges on Page 2, Section A of the Closing Disclosure include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points you paid in 2019. Other fees in this section are NOT tax deductible. Only bona fide points are deductible if they are expressed as a percentage of the loan amount and paid in exchange for a lower interest rate.
Points paid on a mortgage refinance in 2019
Closing Disclosure Page 2, Section A
If the origination charges on Page 2, Section A of the Closing Disclosure include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the following manner:
You can deduct over the life of the mortgage all points paid on the portion of the mortgage proceeds that were not used for home improvements (for example, if you refinance your mortgage to reduce your interest rate, but do not take any cash out for home improvements). Or,
You can deduct this year all points paid on the portion of the mortgage proceeds that were used for home improvements (if you received cash-out and are using that cash-out for home improvements).
Remember, any points paid on the portion of the mortgage NOT used for home improvements must be spread out over the life of the loan. For example, assume you refinance an old $200,000 mortgage into a new $300,000 mortgage and walk away with $100,000 to be used for home improvements. In this case, 1/3 of your points are fully deductible this year (so include them in your itemized tax return!) and 2/3 of your points (which are not being used for home improvements) are deductible over the life of the loan.
Note: Other fees itemized in this section are NOT tax deductible.
Property taxes (actual and prorated)
Closing Disclosure Page 2, Section F
Property taxes itemized in this section are generally tax deductible in the year they are paid. So, if you paid them in 2019 then you can include them in your tax return. However, property tax escrows in section G are not tax deductible until they are actually paid by your mortgage company to the municipality (city, state, county).
Prepaid interest
Closing Disclosure Page 2, Section F
Mortgage interest is calculated in arrears. This means that your monthly mortgage payment covers the previous month. So, your February mortgage payment covers you for January. Oftentimes, when you refinance a mortgage or buy a new home, you “skip” a month’s worth of mortgage payments. That is why you may have to pay "prepaid interest" or “daily interest charges” in Section F of the Closing Disclosure. These daily interest charges cover the interest for the current month. If your mortgage interest is deductible, then the prepaid interest that you pay in this section is also deductible. Your mortgage company will send you a 1098 statement with this information as well.
Previous year points not yet deducted
You may be able to deduct the remaining portion of the original points paid on an old mortgage if you refinanced that old mortgage in 2019. For example, assume you paid points on a refinance transaction 3 years ago. You probably were not able to deduct all the points you paid in the year they were paid. Instead, you had to spread that deduction out over the 30-year life of your mortgage. So, assume you’ve deducted 3/30 of those points so far, and you refinance your mortgage again in 2019. You can now deduct the remaining 27/30 of those old points that you have not yet deducted.
Prepayment penalties
A prepayment penalty paid on an old loan would be deductible on your 2019 tax returns if the new loan was taken out from a different lender than the old loan.
Other Closing Costs
Closing costs not mentioned above are not tax deductible. However, they are added to your “tax basis” for the purpose of calculating your capital gain when you sell the property. In other words, you may be able to reduce your capital gains tax (if applicable) when you sell the property in the future because your home purchase closing costs get added to your cost basis.
Distinction between a qualified residence and an investment property
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.