One of the benefits of owning a home is deducting the interest and many of the mortgage costs on your taxes. What happens when you refinance your VA loan, though? Are you still able to deduct the closing costs?
Unfortunately, you won’t be able to deduct very many closing costs pertaining to your VA refinance. There are a few exceptions to the rule, though. We help you understand those below.
The Closing Costs You Can Deduct
When you think of closing costs, you probably think of things like credit report fees, underwriting fees, and escrow fees. These aren’t the only closing costs you pay, though. You may also pay points and mortgage insurance fees – these are the closing costs that you may deduct.
Basically, the IRS allows you to deduct any closing costs that pertain to interest or real estate taxes. That being said, certain closing costs are considered interest. Any points you pay on a loan are actually interest, you just pay it upfront. It’s ‘prepaid interest.’
The points you pay you can deduct on your taxes just like you can deduct the interest you pay each month. This can help your tax liability in the year that you refinance as well as a few subsequent years as you usually have to prorate the amount you paid over the life of the loan.
You can also deduct any taxes you pay upfront. If you happen to refinance close to your real estate tax due date, you’ll have to pay the taxes at the closing. You can then deduct the real estate taxes from your income taxes.
The Closing Costs You Cannot Deduct
Unfortunately, the list is very long regarding the closing costs you cannot deduct when refinancing your VA loan. The good news is that the VA limits the amount of closing costs you can pay. Lenders can’t charge you certain costs and they also have limits regarding the closing costs they are allowed to charge.
In general, you may pay:
- Origination or discount points as we discussed above
- Credit report fee
- Appraisal fee
- Title fees
- Recording fees
- Survey fee
- Flood certification fee
- VA funding fee
You cannot pay any fees related to:
- Document preparation
- Closing Protection Letter
- Mortgage broker
This does help keep your out of pocket costs lower when refinancing your VA loan.
While the bad news is that you can’t deduct your VA refinance closing costs, the good news is that there may be a few fees that will help lower your tax liability. As always make sure to consult with your tax professional to ensure that you write off the correct charges.