Are VA Refinance Mortgage Closing Costs & Fees Tax Deductible?

You want to refinance, but know that the costs are going to eat up your finances. What if you could recoup some of those costs by writing them off on your taxes?

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While you may be able to deduct some of the fees you pay on your mortgage, this year brings a whole new set of rules that may limit who actually gets to write off their closing costs.

Most Closing Costs Aren’t Tax Deductible

Let’s start with the fact that you can’t write off a large majority of your closing costs. Things like underwriting, processing, document, credit report, appraisal, and title search fees are not tax deductible. You’ll have to eat these fees, which is why it’s important to make sure the refinance is worth it. There’s no reason to pay 2% to 5% of your loan amount if you won’t benefit from the refinance.

Prepaid Interest

You should be able to write off the interest you pay on your mortgage, which technically isn’t a closing cost. But, depending on when you close on your loan during the month, you may pay prepaid interest. This cost covers the interest you would owe for the remainder of the month in which you close. For example, if you close on May 15th, you would owe interest from May 15th – May 31st. The lender would charge you a per diem interest, which you would pay every day for that period. You may deduct this on your taxes in some cases.

You May be Able to Deduct Points

The one closing cost that you may be able to deduct is the points you pay. You may pay origination points or discount points. Origination points are usually closing costs in disguise. They are a way for the lender to make more money or to get away with certain fees that otherwise wouldn’t be allowed if they were itemized.

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Discount points are something borrowers choose to pay in order to get a lower interest rate. It’s a good strategy for homeowners that know they are going to stay in their home for as long as possible. You probably want to keep your interest charges to a minimum, especially if you are going to pay them for the next 20 – 30 years. Paying one point usually knocks an interest rate down about 0.5%.

Points are an eligible write off on your taxes, but only in some cases.

You May Deduct Real Estate Taxes

Sometimes borrowers have to pay real estate taxes upfront when they close on a loan. This is the case when the real estate taxes in your county become due and payable soon after the closing. The lender will require the full payment at the closing, which you can then deduct. Of course, you could deduct this expense whether you pay them at the closing or afterwards, as it’s a fee you’ll pay either way.

Will You Take the Standard Deduction?

Here’s the biggest problem. Any of the above write-offs are legitimate, but only if you itemize your tax deductions. Up until 2018, itemizing was the common way to get write-offs, as many homeowners had many more deductions than the standard deduction allowed.

This year, however, the standard deduction increases to $24,000. Experts predict that only 4% of homeowners throughout the country will actually qualify to itemize their tax deductions any more. This means you lose any of the above deductions.

Are you really losing the deductions, though? It may be somewhat of a trade-off. Now you are getting a higher standard deduction, but you can’t write off your individual expenses. It may feel as if you are getting the short end of the stick, but it may work out the same in the end. In fact, it may just make filing your taxes a little easier, as you’ll need less paperwork and fewer schedules to complete your taxes.

As always, talk with your tax advisor about what you can and cannot deduct on your taxes. It’s a good idea to get a handle on the tax situation now so that you are prepared come tax time next year.

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