Buying, selling or refinancing a home all have
tax ramifications, from the deduction for mortgage
interest and real property tax to the possible taxable
gain when home is sold. When a principal residence
loan is refinanced, the points paid are generally
amortized over the life of the loan unless the loan
proceeds are used to purchase or improve the residence.
A recent Tax Court decision involved a taxpayer
who refinanced his mortgage to lower his monthly
payments 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. However,
the taxpayer won in Tax Court because the refinancing
was done 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 the monthly savings during
the four years before the loan was refinanced again.
The key was that the purpose of the refinancing
was to provide funds for the home improvements.
Please let your CPA 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.
by Laurie Young-Kagamida
