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Any points that you pay in the refinancing of
your residence are tax deductible over the
length of the loan in question. The deduction is
allowable only if the residence is your primary
home and the new mortgage replaces a previous
one and/or is used to improve the residence. To
the extent that money is taken out to pay off
credit cards and non-residence costs, the points
may not be used as a tax deduction.
Big Deductions By Refinancing Twice
If you refinanced your primary residence twice
during 2004, you may be in for a very nice
surprise. A significant tax deduction can be
created when you refinance twice in one year. If
you refinance a mortgage, you accelerate the
deductible amount of points from the first
mortgage and may claim the points from the first
mortgage all at once.
As an example, assume that I refinanced my home
in January 2004 and paid $3,000 in points.
Interest rates continued to drop through 2004
and I then decided to refinance again in August.
Because I paid off the original loan with the
refinance, I am able to accelerate the value of
the points of the January loan.
So, what tax deductions have I created for my
2004 filing period? Initially, I am going to
deduct a percentage of the points off of my
latest refinance. The deduction will amount to
the total amount of points paid divided by the
total months of the loan. This will not be a big
deduction, but every little bit helps.
In addition to this amount, however, I will also
deduct the full $3,000 in points that I paid on
my January 2004 refinance! I am able to claim
this deduction because I "accelerated" the
deductibility of the points by paying of January
mortgage with the August refinance.
By refinancing twice, I get a lower interest
rate and a healthy tax deduction. Ah, the value
of owning a home.
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