Refinancing your mortgage can have a range of effects on your taxes, depending on the type of loan you take out and how you use the proceeds. The Tax Cuts and Jobs Act (TCJA) changed certain aspects of the tax code a few years ago, making it much less beneficial to own a home than it used to be. However, if you itemize your deductions, you may still be able to deduct certain costs, such as mortgage interest. When it comes to refinancing your mortgage, the earnings from a cash-out refinance are not considered income for tax purposes.
Your lender or servicing entity will provide you with Form 1098 (mortgage interest you paid), but this form does not include any breakdown of interest that is considered acquisition debt (and is deductible) and interest that is not considered acquisition debt (and is not deductible). This means that you're responsible for determining which one is and which one isn't, so you'll need to closely track (and keep a good record) of how you used the proceeds from your cash-out refinance. Keeping track of loan principal amounts separately in a spreadsheet can help you keep things clear, and an amortization calculator can also help in this case. The points paid when refinancing are not returned in full during the year in which the refinancing was obtained.
Instead, the points must be deducted in equal parts over the life of the loan. To calculate the amount of the annual deduction, divide the total points paid by the number of payments to be made over the life of the loan. Usually, the lender can obtain this information. Spreading the points paid over the life of the loan isn't the only factor that determines whether your refinancing expenses are fully tax-deductible or not.
You should also consider whether your original loan was granted before or after October 1987 (if you contracted mortgage debt before October). The latter factor can sometimes allow you to pay off more expenses during the refinancing year. It's also a good idea to read IRS publication 936, where all the nuances related to the tax deductibility of mortgage refinancing expenses are explained in detail.
