Tax Implications of Refinancing an Investment Property
Refinancing an investment property can have several tax implications that property owners need to understand:
Key Tax Considerations:
- Mortgage Interest Deduction: Interest paid on investment property loans remains tax-deductible as a business expense on Schedule E.
- Points and Closing Costs: Points paid during refinancing must be amortized over the life of the loan rather than deducted immediately.
- Cash-Out Refinancing: The cash received is not considered taxable income since it’s a loan, but interest on the additional borrowed amount is tax-deductible if used for property improvements.
- Property Depreciation: Refinancing doesn’t affect your ability to continue claiming depreciation on the property.
Important Tax Rules:
- You can deduct mortgage interest on up to $750,000 of qualified residence loans (for loans taken after December 15, 2017)
- Property taxes remain deductible up to $10,000 combined with other state and local taxes
- Loan origination fees are typically deductible over the loan term
Frequently Asked Questions:
Q: Is the cash from a cash-out refinance taxable?
A: No, cash received from refinancing is not taxable as it’s considered a loan, not income.
Q: Can I deduct refinancing closing costs immediately?
A: No, closing costs must be amortized over the life of the new loan.
Q: Does refinancing affect property depreciation?
A: No, refinancing does not impact your ability to continue claiming depreciation.
Q: Are points paid on refinancing tax-deductible?
A: Yes, but they must be deducted over the life of the loan, not in the year paid.
Q: Can I deduct the old loan’s remaining points when refinancing?
A: Yes, any undeducted points from the previous loan can be deducted in the year of refinancing.
Q: Is mortgage insurance premium tax-deductible on investment properties?
A: Yes, mortgage insurance premiums are generally deductible as a business expense.
Q: How does refinancing affect my tax basis in the property?
A: Refinancing itself doesn’t change your tax basis, but improvements made with refinanced funds can increase it.
The Bottom Line:
Refinancing an investment property can offer significant tax benefits through continued interest deductions, but it’s crucial to understand how to properly claim these deductions and amortize costs. Always consult with a tax professional for specific advice related to your situation, as tax laws can change and individual circumstances vary.