Can I Deduct Refinance Closing Costs? + FAQs

Yes, you can deduct some refinance closing costs on your U.S. tax return – but not all of them.

Under federal law, only specific costs (like mortgage interest and property taxes) qualify as tax-deductible, while many other fees cannot be written off. Below are key points to know:

🏠 Primary home – Only certain costs are deductible. Generally, you can deduct prepaid mortgage interest (points) and property taxes paid at closing (if you itemize deductions). Most other refinancing fees (e.g. appraisal, title insurance) are not tax-deductible.
💼 Rental & business properties – More costs can be deducted. If you refinance an investment property or business property, you can typically deduct interest, points, and even closing fees as business expenses (often spread out over the loan’s life).
📜 Federal rules vs state – Federal law sets the baseline. IRS rules determine what you can deduct. State tax laws may have their own twists – some states follow federal rules, while others limit or disallow certain deductions (see state chart below).
⚠️ Common tax mistakes – Be careful with deductions. Mistakenly deducting non-deductible closing costs or not amortizing refinance points correctly can lead to IRS issues. It’s vital to know which costs qualify and keep good records.
💡 Opportunities – Don’t leave money on the table. Deductible refinance costs can lower your tax bill, especially for large mortgages or rental properties. Properly deducting allowed costs (like points or interest) can save you money over time.

Now, let’s break down exactly which refinance closing costs are deductible, the pitfalls to avoid, examples for different property types, and the legal rules behind these deductions.

Which Refinance Closing Costs Are Tax Deductible?

When you refinance a mortgage, only certain closing costs are tax-deductible. The IRS primarily allows deductions for costs that are considered interest or property taxes. Most other refinancing fees are treated as personal expenses and cannot be deducted on your income tax return.

For a primary residence or second home (personal use properties):

Mortgage Interest – The interest you pay on the new loan is generally deductible if you itemize deductions. This includes any prepaid interest at closing (for example, if you pay interest for the partial month at closing). You’ll deduct mortgage interest on Schedule A (Itemized Deductions) just like before refinancing. (Note: Interest is only deductible on up to $750,000 of mortgage debt for loans originated after 2017, or $1 million for older loans – more on that later.)

Points (Loan Discount Points) – Points are basically prepaid interest. If you paid points to your lender to get a lower rate, those points are tax-deductible as mortgage interest. However, refinance points cannot be deducted all at once in the year you paid them (except in certain cases). Instead, you generally amortize (spread out) the deduction over the life of the loan. For example, if you paid $3,000 in points on a 30-year refinance, you can deduct $100 per year for 30 years. (If you refinance again or pay off the loan early, any remaining undeducted points can be deducted at that time.)

Property Taxes – If you paid any real estate taxes at closing (such as reimbursing the seller for property taxes they prepaid, or paying taxes due at closing), those amounts are deductible as property taxes. You can claim them on Schedule A in the year you paid them. (Keep in mind the $10,000 limit on state and local tax (SALT) deductions – which covers property taxes – on your federal return.)

Mortgage Insurance Premiums – Many homeowners pay private mortgage insurance (PMI) or FHA mortgage insurance when refinancing. Currently, PMI premiums are not tax-deductible for federal taxes (the tax law allowing a PMI deduction expired after 2021). That means any upfront mortgage insurance fee (for example, a VA funding fee or FHA upfront MIP) or ongoing PMI you pay is not deductible as an itemized deduction in 2025. (Exception: If the law changes or retroactively extends the PMI deduction, this could be deductible for eligible taxpayers. Always check the latest rules.) For rental or business properties, insurance premiums (including mortgage insurance) are deductible as a business expense – but on a personal residence, they’re not deductible under current law.)

Other Closing Fees – Most fees for services and paperwork are NOT deductible on a personal residence refinance. This includes costs like appraisal fees, home inspections, title insurance, attorney fees, title search, recording fees, transfer taxes, credit report charges, underwriting and loan origination fees (except any portion that’s explicitly “points”), and survey fees. The IRS considers these one-time fees as part of the cost of getting a loan – not interest – so you cannot deduct them. You also typically can’t add them to your home’s cost basis either (since refinancing is not a purchase or improvement of the property itself).

Escrow and Insurance – Sometimes your closing involves setting up an escrow account for property taxes or homeowners insurance, or prepaying hazard insurance premiums. Escrow deposits aren’t deductible (they’re just your money held for future bills). The property tax will become deductible when the lender actually pays it to the taxing authority from escrow. Homeowners insurance premiums are never tax-deductible on personal-use properties.

In short, for personal homes the only deductible refinancing costs are those that can be classified as mortgage interest (including points) or property taxes. Everything else at closing is not deductible as a personal itemized deduction (though they may still affect your finances, they just don’t get you a tax break).

For a rental or business property refinance, many of these same costs can eventually be deducted (more on that in the Comparisons section). But first, here’s a handy cheat-sheet of common refinance closing costs and whether they’re deductible on a personal tax return:

Closing Cost Item	Deductible on Personal Taxes?
Mortgage interest (ongoing interest payments and any interest paid at closing)	Yes. Treated as home mortgage interest. Deductible if you itemize, subject to mortgage debt limit rules.
Points (prepaid interest)	Yes, but over time. Deductible as mortgage interest, usually spread over the loan’s term (can’t deduct all in year paid, unless loan is for purchase/build/improve of main home and meets IRS conditions).
Property taxes (paid at closing)	Yes. Deductible as real estate taxes in the year paid (if you itemize), subject to the $10k SALT limit for state/local taxes.
Mortgage insurance premiums (PMI, FHA MIP, VA funding fee)	No (for personal residence in 2025). The tax deduction for PMI expired, so it’s not deductible currently. (For rentals/business, insurance is deductible as an expense.)
Appraisal, underwriting, and other lender fees (application fees, processing fees, origination charges not labeled as points)	No. These are service fees – not tax-deductible. (They also do not count as interest even if required by the lender.)
Title-related fees (title search, title insurance)	No. Not deductible. These protect ownership/loan security, not interest or taxes.
Legal and recording fees (attorney, notary, recording, state or local transfer taxes on the refinance)	No. Treated as part of the refinancing process cost – no deduction. (Transfer taxes on a new loan are not property taxes, so they can’t be deducted as tax.)
Homeowners insurance (premium or escrow reserves)	No. Never deductible for personal property. It’s a personal expense (and escrow reserves aren’t deductible at deposit).
Escrow reserve deposit (for future taxes/insurance)	No. Just setting aside your money. Only actual property tax paid from escrow is deductible when it’s paid out to the tax authority.

Note: If any of the non-deductible fees (like appraisal, title, etc.) were for a business or rental property, they aren’t immediately deducted either – but you can usually amortize those costs over the loan term for your business/rental taxes. We’ll explain that later. The table above is focused on a personal home refinance and federal taxes.

As you can see, the IRS draws a hard line between interest/tax expenses (deductible) and everything else (not deductible) for refinancing a home you live in. Next, we’ll look at some common mistakes to avoid when deducting refinance costs, and then dive into specific examples and scenarios.

Mistakes to Avoid When Deducting Refinance Costs

Refinancing your mortgage can yield tax benefits, but it’s easy to slip up and misreport things on your tax return. Here are some common mistakes and pitfalls – and how to avoid them:

Mistake #1: Deducting all closing costs. Many people assume every fee paid during refinancing is tax-deductible. This is wrong. As noted above, the IRS only allows deductions for interest and property taxes – not routine closing fees. For example, don’t try to write off your appraisal, attorney, or title fees; claiming those personal expenses could raise a red flag with the IRS. Always separate the deductible items (points, interest, taxes) from the non-deductible ones on your closing statement.

Mistake #2: Deducting refinance points in full the first year. If you paid points on a refinance, you cannot deduct the full amount in the year of closing (unless the loan was used to buy or substantially improve your main home and meets specific IRS criteria). A common mistake is treating refinance points like purchase points. For a standard refi, you must amortize points over the life of the loan. For instance, if you paid $5,000 in points on a 20-year refinance, you should deduct $250 per year for 20 years. Deducting the whole $5,000 at once will likely get corrected by the IRS (and you could owe back taxes and interest for the over-deduction).

Mistake #3: Not itemizing (or not meeting requirements) but expecting a deduction. Refinance costs for a personal home only help you if you itemize your deductions on Schedule A. If you take the standard deduction (which is a fixed amount – $13,850 for single filers in 2025, for example), you can’t separately deduct mortgage interest or property taxes at all. Some homeowners refinance and pay points, then don’t have enough total deductions to itemize – effectively losing the tax benefit of those points. Make sure your total itemizable deductions (interest + taxes + others like charity, etc.) exceed your standard deduction, or else the refinance interest/points won’t actually reduce your tax. Tip: If the standard deduction is higher, you’re generally better off taking it – but then none of your refinancing costs will specifically count. Plan ahead if you’re paying points solely for a tax break.

Mistake #4: Forgetting to amortize and track the deductions over time. Deducting refinance points and other amortizable costs isn’t a one-and-done deal – you must remember to take the deduction each year. A mistake here is failing to deduct the annual portion of points in subsequent years (essentially leaving money on the table). For example, if you deducted $100 of points this year, be sure to deduct the $100 again next year, and so on. Conversely, some people forget the rule and accidentally deduct the full amount again each year – which is also wrong. Keep a record of your total refinance points and how much you’ve deducted so far. It can help to attach a worksheet to your tax files or use tax software that tracks carry-forward amounts.

Mistake #5: Not deducting remaining points after refinancing again or paying off the loan. If you refinance again or sell your home before the loan term ends, the rules let you deduct any remaining undeducted points from the previous refinance. This is a one-time deduction you shouldn’t miss. For instance: Say you refinanced in 2022 and were spreading $2,400 of points over 30 years ($80/year). If you refinance again in 2025 with a different lender, you get to deduct all the leftover points from the 2022 loan on your 2025 return. In this case, you deducted $80 in 2022, 2023, 2024 (total $240), and you still had $2,160 left – you can claim that $2,160 as additional interest in the year of the new refi. Don’t forget to do this! (One caveat: if you refinance with the same lender, the IRS doesn’t allow an immediate deduction of the old points – instead, you continue to amortize them. So this tip mainly applies when you switch lenders or pay off the loan completely.)

Mistake #6: Deducting interest that isn’t actually deductible (home equity debt issue). The 2017 Tax Cuts and Jobs Act changed the rules for home equity loans and cash-out refinances. Interest on mortgage debt that is not used to buy, build, or improve your home is not deductible as home mortgage interest. This means if you did a cash-out refinance and used, say, $30,000 of the cash to pay off credit cards or buy a car, the interest on that $30k portion is personal interest (not deductible). Only the interest on the portion of the loan equal to your old mortgage balance (or any cash used for home improvements) remains deductible. A mistake is continuing to deduct 100% of your refinance interest when you’ve actually taken cash out for non-home purposes. Make sure to track how refinance funds are used. If the cash-out goes toward a new kitchen or home addition, that is considered home improvement (so that portion of the loan’s interest can still qualify as deductible mortgage interest). But if it’s used for personal expenses, you need to allocate and exclude that interest from your deduction.

Mistake #7: Failing to keep documentation. In the event of an IRS inquiry or audit, you must have records to substantiate your refinance deductions. Don’t throw away your Closing Disclosure (HUD-1) or Form 1098 from the lender (which shows how much interest and points you paid). A major mistake is not being able to prove you actually paid what you deducted. In a 2022 Tax Court case (Pressman v. Commissioner), a taxpayer’s $75,000 mortgage interest deduction was denied because he did not substantiate the payments properly. Avoid this by keeping copies of mortgage statements, escrow statements for property taxes paid, and proof of points paid. Good recordkeeping is your best defense if the IRS asks questions later.

By steering clear of these pitfalls, you can safely maximize the tax benefits of your refinance without running afoul of the law. Next, let’s look at some detailed examples to see how these deductions play out in real life for different scenarios.

Detailed Examples of Refinance Cost Deductions

To make this more concrete, here are a few scenarios demonstrating how refinance closing costs deductions work in practice:

Example 1: Primary Residence Refinance (Homeowner Scenario).
John refinances the mortgage on his personal home. His new loan is $300,000 for 30 years at a lower interest rate. In the refinance, John pays $2,000 in points to the bank (to get an even lower rate), $500 in an origination fee, $400 for an appraisal, $1,200 for various title and legal fees, and $1,800 of property taxes (the lender required him to prepay some county property tax due shortly after closing). How can John deduct these costs?

John can deduct the $2,000 in points as mortgage interest – but not all at once. Since this is a refinance of his principal residence and not a purchase, he’ll amortize the points over the 30-year loan. That means each year John can deduct $2,000/30 = $67 as additional mortgage interest on Schedule A. It’s a modest yearly deduction, but it adds up over time. If John itemizes, he’ll include this $67 along with his regular mortgage interest. (If John had used this refinance to substantially improve his home – say $50k of the loan was for a kitchen remodel – he might be able to deduct the proportional points in the current year. For example, if half the loan was used for improvements, he could deduct half the points now = $1,000, and amortize the rest.)

The $1,800 in property taxes John paid at closing is fully deductible in the year of purchase. He will add that amount to his property tax deduction on Schedule A (mindful that his total state/local tax deductions including property tax can’t exceed $10,000 due to the SALT cap). Essentially, John paid some of his property taxes early via the closing – the IRS treats it the same as if he paid the tax bill directly.

John’s $500 origination fee: This is tricky – sometimes what lenders call an “origination fee” is actually points (prepaid interest). If it’s calculated as a percentage of the loan (for example, “1% origination fee” on $300k = $3,000) and was a required charge for getting the rate, the IRS might treat it as points/interest. However, in John’s case it was a flat $500 processing fee. That $500 is not deductible for a personal residence. It’s a cost of obtaining the loan, not interest. John cannot write this off.

The $400 appraisal and $1,200 title/legal fees are not deductible. John simply had to pay those as part of the refinancing process. They won’t appear anywhere on his tax return. (They also don’t affect the basis of his home – they’re just gone.)

In total, John’s immediate tax deductions from the refinance in the first year will come from: his regular mortgage interest on the new loan (say $X per year, reported on Form 1098 by the lender), + $67 for the amortized points, + $1,800 property tax if he itemizes. The other $2,100 of various fees yield no tax benefit.

Fast forward: Suppose John refinances again or sells the house after 5 years. At that point, he would have deducted 5 * $67 = $335 of the points. He would be allowed to deduct the remaining $1,665 of points in that year (assuming he refinances with a different lender or pays off the loan). This would give him a one-time larger interest deduction in the year of the second refi or sale. He must remember to take it (and it would be reported as “interest not reported on Form 1098” on his Schedule A).

Example 2: Rental Property Refinance (Landlord Scenario).
Sarah owns a rental property (a condo she rents out). She refinances the mortgage on her rental. Her closing costs include $3,000 in points, $2,000 in various bank fees (underwriting, processing), $600 for appraisal, $1,000 in title insurance and recording, and $0 in property taxes (none were due at closing). How are these handled on her taxes?

Because this is a business (rental) property, Sarah will report the rental income and expenses on Schedule E of her tax return. The interest on the new loan is fully deductible against rental income (no itemizing needed; it’s a straight business expense). That includes interest paid each year as well as the points which are treated as prepaid interest.

However, unlike a personal residence purchase, she cannot deduct the $3,000 points all at once either – she must amortize them over the loan term. Let’s say it’s a 15-year loan; she’ll deduct $200 of the points per year as a rental expense (usually entered as an “Amortization” expense on Schedule E). If she sells the property or refinances again in 5 years, any remaining unamortized points would be deducted at that time as a final expense.

All of Sarah’s other closing costs (bank fees, appraisal, title, etc. totaling $3,600) are deductible against her rental income, but not all at once in Year 1. The IRS views these as part of the cost of obtaining the new loan, which is an intangible asset related to her rental business. She will likely amortize the $3,600 over the 15-year loan as well, just like the points. This means $240 per year can be deducted as an expense.

In practice, Sarah might combine the points and other fees ($3,000 + $3,600 = $6,600 total) and amortize the whole amount over 15 years, which comes out to $440 per year of deductible expense. She would report this on Schedule E every year. If using tax software, she’d set up an “amortizable intangible asset” for loan costs and it would calculate the annual deduction.

Important: Sarah’s rental refinance costs do not get lost. Even though she can’t deduct everything immediately, she eventually deducts the full $6,600 over time. If she sold the property after, say, 10 years, whatever was left (5 years worth of costs) would be deducted in that final year on Schedule E.

Property taxes: In this example, none were paid at closing. But if Sarah had paid any property tax bill as part of closing, that portion would be deductible in full that year on Schedule E (since property taxes on a rental are a direct expense, not subject to the SALT limit on Schedule A).

Bottom line: For rental properties, all the refinance costs become deductible business expenses – the interest and points as interest (amortized if points), and the other closing fees as amortizable loan expenses. It’s just spread out over the life of the loan rather than immediate. This differs from a personal home where those other fees are simply never deductible.

Example 3: Business Property Refinance (Commercial Scenario).
Tim owns an office building for his small business. He refinances the commercial mortgage on the building. The closing costs are $10,000 (including some points and various fees). How does this play out for his business taxes?

Similar to the rental scenario, Tim’s company can deduct the interest on the new loan as a business expense. If Tim’s business is a sole proprietorship, this interest would go on Schedule C (or an applicable business form) as an expense. If it’s a separate business entity, it would be on the business tax return. There’s generally no limitation like the personal $750k mortgage cap for business interest, although very large businesses might have other interest deduction limits (under IRC Section 163(j)), but small businesses are usually exempt from those.

Any points or loan fees paid will be treated as an intangible asset for the business and amortized. Typically, the IRS requires amortizing such loan costs over the life of the loan (or a 15-year period, whichever is less, under certain rules). Tim’s business will capitalize the $10,000 as a refinancing expense and deduct roughly proportionately each year. For instance, if it’s a 10-year loan, the business might take $1,000 expense per year for 10 years.

If Tim sells the building or refinances again before that period, the remaining balance of unamortized costs can usually be deducted at that time.

The key difference for business property is that all refinancing costs are deductible in some form (as interest or amortized costs), just like with a rental. None are purely nondeductible; it’s just a timing difference. Tim’s business would not add these loan costs to the building’s basis – they’re handled separately as a deduction over time.

From a cash flow perspective, businesses often consider these costs as the “cost of borrowing” which gets deducted over the loan’s life. There may also be accounting rules (GAAP) to expense them differently on financial statements, but for tax, amortization is the method.

Tim should also be aware of any state tax differences for businesses – but generally states follow similar principles for business deductions.

These examples illustrate the general principles:

Homeowners (personal use) get to deduct interest (including points, slowly) and taxes, but not other fees.
Investors/Landlords get to deduct everything related to the loan, albeit spread out.
Businesses similarly deduct all costs over time.

Next, we’ll compare these scenarios side-by-side and provide evidence from IRS rules that back up these treatments.

Evidence from IRS Rules & Tax Law

The guidance on refinance closing costs comes straight from U.S. tax law and IRS regulations. Here are some key authoritative points that explain the rules:

Internal Revenue Code & IRS Publications: The IRS explicitly states (in Publication 530 “Tax Information for Homeowners” and Publication 936 “Home Mortgage Interest Deduction”) that for personal residences, “the only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes.” In other words, if it’s not interest (including points) or property tax, it’s not deductible. This is why all those miscellaneous fees at closing don’t show up on your tax forms.

IRS Topic No. 504 – Home Mortgage Points: The IRS categorizes points as a form of prepaid interest. For a refinance, it says points are deducted ratably over the life of the loan. This is rooted in tax law: generally, prepaid interest must be amortized (spread out) rather than deducted upfront (IRC Section 461(g)). There is an exception in Section 461(g) for points related to the purchase or improvement of a principal residence, allowing immediate deduction if certain conditions are met. Those conditions (outlined in Rev. Proc. 94-27 and IRS Pub 936) include things like: the loan is secured by your main home, paying points is common in your area, the points aren’t excessive, and they were paid directly by you (not financed). If you meet all the criteria and the loan was used to buy or build your primary home (or improve it), you can deduct those points in the year paid. However, this safe harbor does not apply to refinances that are just to pay off old loans or get cash. The IRS has made clear that refinance points are generally considered paid to refinance existing debt, not to acquire a new home, so they don’t qualify for immediate deduction (except proportionally for any new money used for home improvements).

Original Issue Discount (OID) rules: Points on a refinance that are withheld from the loan (financed into the loan) are treated under OID rules. The effect is the same: you deduct a little each year. Cash-basis taxpayers (most individuals) can just do a straight-line amortization. If you’re an accrual taxpayer or a business, you’d follow the more complex OID amortization schedule.

No deduction for service fees: The IRS and courts have consistently held that costs like appraisals, title fees, and legal fees are capital in nature (or personal) and not interest, so they don’t get the privilege of deduction. IRS Pub 530 explicitly lists many non-deductible items like these. If you try to deduct them on a personal return, the IRS will disallow it.

Rental and business expense treatment: Tax regulations treat the costs of obtaining a loan for income-producing purposes as amortizable intangible expenses (usually under Section 163 and Section 461). For example, Treasury Regulation 1.163-5 covers bond premium and discounts – by analogy, loan fees are handled similarly by amortization. Accountants often refer to these as deferred financing costs. While you won’t find a line on Schedule E that says “closing costs,” the proper method as shown in IRS instructions is to deduct them over time, often using Form 4562 (Depreciation and Amortization) to report the deduction for intangible assets.

Home equity interest limitation: The Tax Cuts and Jobs Act of 2017 eliminated the deduction for interest on home equity loans (and cash-out refis) that are not used for home acquisition or improvements, for 2018 through 2025. The IRS clarified in a 2018 advisory that if you refinance and take additional cash not used on the home, that portion of the loan’s interest is not deductible. This is grounded in IRC Section 163(h), which now defines “qualified residence interest” more narrowly. It’s important evidence that not all mortgage interest automatically gets a write-off – you must consider how the funds are used.

Tax Court cases: There have been several cases reinforcing these rules (we’ll detail them in the next section). For instance, the Tax Court in Dodd v. Commissioner (T.C. Memo 1992-341) held that points on a refinance must be capitalized (not currently deducted). The IRS’s position was upheld generally: refinance points = amortize.

Eighth Circuit exception (Huntsman case): One notable case, Huntsman v. Commissioner (8th Cir. 1990), created a bit of a wrinkle. In that case, a couple took out a short-term loan to purchase a home, then quickly refinanced into a long-term one, all with the intention of buying the house. They paid points on the refinance, and tried to deduct them as if it were part of the purchase. The Tax Court said no, but the 8th Circuit Court of Appeals reversed, agreeing that because the taxpayers intended all along to refinance the interim loan as part of acquiring the residence, the points could be considered purchase-related and deducted immediately. However, the IRS did not acquiesce to this decision – meaning outside of the 8th Circuit’s jurisdiction, the IRS will still challenge anyone who deducts refinance points in the year paid. So, unless your situation is very unique and in that region, plan on amortizing those points.

Refinance with same lender vs new lender: IRS guidelines have an interesting quirk: if you refinance with the same lender, you cannot deduct unamortized points from the old loan – you must continue to amortize them. If you refinance with a different lender, any remaining old points become deductible now. This isn’t spelled out in a statute, but it’s an IRS administrative position (mentioned in IRS publications and taxpayer Q&As). The logic is that refinancing with the same lender is often viewed as a modification of the original loan rather than a completely new loan for tax purposes.

Document everything: While not a “rule,” a recurring theme in IRS guidance and court cases is the need for documentation. Keep those closing statements and Forms 1098. If audited, you’ll need to show the IRS what you paid and how you’re calculating the deductions each year.

All these points show that the tax code is quite strict about what’s deductible. The big picture: Interest and taxes = yes, fees = no (with timing rules for any prepaid interest). Now, let’s compare how things differ between personal and business scenarios, and then look at some legal cases that have shaped these rules.

Primary vs. Rental vs. Business: A Comparison

To clearly see how refinance deductions vary by property type, here’s a comparison of key factors between refinancing your personal home and refinancing a rental or business property:

Aspect	Personal vs. Rental/Business
Deductible items	Personal: Only interest (mortgage interest & points) and property taxes are deductible; other refi fees are not. Rental/Business: Almost all refinance costs are deductible (interest, points, fees) as business expenses (though spread out over time).
Timing of deductions	Personal: Points must be amortized over the loan term (unless for home purchase/improvement); interest & taxes deducted as paid (if itemizing). Rental/Business: Points and loan costs are amortized over the loan’s life; interest and property taxes are deducted each year (no itemizing required).
Need to itemize?	Personal: Yes – you must itemize on Schedule A to deduct mortgage interest/points and property tax. Rental/Business: No – deductions are taken directly against rental or business income on the appropriate schedule, regardless of personal itemization.
Loan purpose limits	Personal: Interest deductible only on up to $750k of acquisition debt (or $1M for older loans); cash-out interest not deductible unless used for improvements. Rental/Business: No specific loan limit – all interest on business debt is deductible. (Large businesses may have separate interest deduction limits, but not like the personal $750k cap.)
Unamortized points at payoff	Personal: If you refinance with a new lender or sell, remaining undeducted points from the old refi become deductible that year (if same lender, they carry over). Rental/Business: Remaining unamortized loan costs can be deducted in the year of refinance payoff (no matter the lender).
Other tax factors	Personal: Subject to SALT $10k limit for property tax deduction; also, many homeowners don’t itemize, which can limit use of these deductions. Rental/Business: Could be subject to passive loss limits (for rentals) if expenses create a loss – otherwise generally fully usable. No SALT cap or standard deduction issues for business expenses.

In summary, personal residence refinancing is treated very differently from income-property refinancing for taxes. A homeowner’s tax break is limited and conditional, whereas a landlord or business owner gets to treat refinance costs as part of the cost of doing business (fully deductible, albeit possibly over a number of years).

Key Terms Explained

To navigate refinance deductions, it helps to understand some key tax and mortgage terms. Here’s a quick glossary of important terms and related concepts:

Refinance (Refi): Replacing an existing loan with a new one, typically to get a better interest rate, change the loan term, or take cash out. For tax purposes, a refinance is not a purchase – it’s simply new financing on a property you already own. This distinction matters because the tax treatment of costs differs from an initial purchase loan.

Closing Costs: The collection of fees and charges paid when you “close” on a loan. In a refinance, closing costs can include lender fees (origination, application), points, appraisal fee, title search and insurance, attorney fees, recording fees, and more. Some of these are interest or tax-related (and potentially deductible), while most are service fees (not deductible for personal taxes).

Points (Discount Points): Prepaid interest that you pay upfront to the lender in exchange for a lower interest rate on the loan. Each point equals 1% of the loan amount. For example, on a $200,000 refinance, 1 point = $2,000. The IRS treats points as prepaid interest. Deductible? Yes, as interest – but in a refinance, generally spread over the life of the loan (unless meeting special conditions for immediate deduction on a main home).

Amortization: In tax, this refers to spreading out the deduction of certain costs over a period of years. It’s similar to depreciation but for intangible costs. When you amortize refinance costs (like points), you deduct a portion each year rather than the full amount at once. The “amortization period” is usually the term of the loan (e.g., 15 or 30 years) for loan fees.

Itemized Deductions: Expenses listed on Schedule A of your Form 1040 that can reduce your taxable income, in lieu of the standard deduction. Key itemized deductions include mortgage interest, property taxes, state income taxes, charitable contributions, etc. You should itemize only if the total of these deductions exceeds your standard deduction. Refinance interest and points will only benefit you if you itemize (for personal homes).

Standard Deduction: A flat amount you can deduct without listing expenses, which for 2025 is $13,850 for single filers ($27,700 for married filing jointly, etc., amounts indexed annually). If you claim this, you cannot separately deduct itemized expenses like mortgage interest or property tax – they’re essentially ignored on the tax return. Many Americans use the standard deduction, especially after 2017 when it nearly doubled. This is why some homeowners get no tax boost from refinancing if their itemized expenses don’t exceed the standard amount.

Acquisition Debt vs. Home Equity Debt: These are terms from tax law (IRC 163(h)). Acquisition debt is a mortgage used to buy, build, or substantially improve your home. Home equity debt is basically any other debt secured by your home (like borrowing against home equity for personal use). Prior to 2018, interest on up to $100k of home equity debt was deductible too. From 2018-2025, interest on home equity debt is not deductible unless the loan proceeds were used for home improvements (in which case it’s treated as acquisition debt). When refinancing, the portion of the loan that exceeds your previous mortgage balance (and isn’t used for improvements) would be home equity debt and thus not deductible under current law.

SALT (State and Local Taxes) Deduction: An itemized deduction for state/local taxes paid, including property taxes and state income (or sales) taxes. The SALT deduction is capped at $10,000 per year (for both single and joint filers) through at least 2025. This means even if you pay $15,000 in property tax (and/or state income tax), you can only deduct $10k. In context, if you pay a large amount of property tax at closing and you already have high state taxes, you might hit this limit and not get to deduct the full amount.

Passive Activity Loss Rules: Tax rules that apply to rental property owners (and other passive businesses). In short, if your rental expenses (including mortgage interest, depreciation, etc.) exceed rental income, you might not be able to use the loss against other income, unless you actively participate and your income is under certain thresholds (up to $25k rental loss can offset other income if you’re active, otherwise losses carry forward). Otherwise, excess losses carry forward to future years or until you sell the property. This matters because refinancing often increases interest expense, which could increase a rental loss. That loss might be limited in the current year by these rules, effectively deferring the tax benefit (but you’ll get it eventually).

Form 1098: A tax form the lender sends you (and the IRS) after year-end, reporting how much mortgage interest and points you paid for the year. For a refinance, your new lender will issue a 1098. If points were paid, Box 6 of the 1098 will show the amount of points you paid that may be deductible. Note: For refinance points, the full amount is reported in the year paid, but remember you’re only supposed to deduct the prorated portion. The IRS knows to expect the amortization, not full deduction, despite the 1098 showing all points. Keep your 1098s as proof of interest paid.

Understanding these terms helps in deciphering IRS instructions and ensuring you apply the rules correctly.

Related Entities and Concepts

This topic touches several entities and related concepts in the world of taxes and mortgages. Let’s discuss a few:

Internal Revenue Service (IRS): The U.S. tax authority that defines what’s deductible and what isn’t. The IRS enforces the Internal Revenue Code (law passed by Congress) and issues publications and rulings. For refinance deductions, the IRS provides guidance in publications (Pub 936, 530), tax topics, and regulations. They also receive forms like 1098 from lenders to cross-check that your mortgage interest deduction matches what was reported. If you claim something inconsistent (like a huge interest deduction that doesn’t match any 1098 form), it may trigger an automated IRS notice. Essentially, the IRS is the referee making sure taxpayers only deduct what they’re allowed.

Mortgage Lenders and Servicers: These are the banks or companies that provide the refinance loan. They play a role in taxes by issuing Form 1098 to you. Lenders also often include points in the closing paperwork. It’s important to identify on your settlement statement which charges were points (interest) versus fees. Lenders might use terms like “loan discount points” or “origination points”. If unsure, ask your lender or broker – Is this fee a point (interest) or just a fee? Lenders aren’t responsible for your taxes, but the way they document the loan can affect how you deduct it. They also might escrow property taxes and pay them on your behalf, which is why you might get an escrow statement showing taxes paid (useful for your deduction calculation).

Types of Loans (Refinance Variations): Not all refinances are identical. A rate-and-term refinance means you simply replace your old mortgage balance with a new loan (no cash out). This is straightforward: interest remains acquisition debt (deductible up to the limit), and if you paid points, they’re amortizable interest. A cash-out refinance means you borrowed more than the old balance and took the extra cash. This is where loan purpose matters – the extra could be treated as home equity debt. If you used the cash for a home improvement, good news: that portion of the loan is acquisition debt and interest on it is deductible (within the overall limits). If you used the cash for personal uses (debt consolidation, etc.), that portion of interest is not deductible under current law. There are also Home Equity Lines of Credit (HELOCs) which are a form of refinance/second mortgage; interest on a HELOC is only deductible if used for home improvements now. Also note, if you took cash out from your home and used it for a business or investment (say to buy a rental property), the interest on that portion might be deductible against that business/investment (via “tracing” rules) – a more complex situation beyond the basic home mortgage rules.

Closing Cost Categories: We discussed many specific closing costs; it’s useful to group them: 1) Prepaid interest (points) – deductible as interest. 2) Taxes (property prorations, etc.) – deductible as taxes. 3) Loan-related fees (origination, processing, underwriting) – not interest, so not deductible for personal, but amortizable for rentals. 4) Services (appraisal, inspections, surveys, attorneys) – not deductible for personal. 5) Insurance (homeowners insurance, title insurance, mortgage insurance) – not deductible for personal (except mortgage insurance was temporarily deductible for 2018-2021, now expired), but insurance on rentals is deductible (mortgage insurance for rentals can be deducted as an expense; upfront fees like a VA funding fee would be amortized as part of loan costs). 6) Recording/Government fees – not deductible (one-time transaction taxes or fees are not the same as property taxes).

Tax Professionals (CPAs/Enrolled Agents): If your refinance is complicated – for instance, you did a cash-out and used some funds for improvements, some for debt payoff – a tax professional can help allocate the interest and points properly between deductible and non-deductible portions. They can also ensure you’re amortizing things correctly year to year. While personal tax prep fees aren’t deductible anymore, if you have a rental property, part of your tax prep expense can be allocated as a rental expense. Consider getting advice if you’re unsure about the rules – it’s cheaper than an IRS mistake.

State Tax Agencies: Each state with income tax has its own rules. Some states allow the same mortgage interest deduction as federal (sometimes with different limits), while others don’t allow certain deductions at all. It’s important to know your state’s stance. For example, as noted later, states like New Jersey and Massachusetts do not allow a mortgage interest deduction on state returns, whereas California and New York do (and even have higher debt limits in some cases). State tax forms often start with federal income or federal itemized deductions and then make adjustments. Always check if your state has any add-back or disallowance related to refinance deductions.

By understanding the roles of these entities – the IRS, the lenders, the type of loan you have, and so on – you’ll be better equipped to handle your refinance deductions correctly.

Notable Court Cases and Rulings

Over the years, a few tax court cases and rulings have clarified (or challenged) the rules on deducting refinance costs. Here’s a recap of some relevant legal interpretations:

Huntsman v. Commissioner (1990, 8th Circuit): This is the landmark case often mentioned regarding refinance points. The taxpayers, the Huntsmans, initially took out a short-term loan (bridge loan) to purchase a home and then refinanced into a permanent mortgage, paying points on that refinance. They argued the points were essentially part of acquiring their home (since the interim loan was always meant to be replaced by the permanent loan). The Tax Court disagreed, but on appeal the 8th Circuit sided with the taxpayers, allowing them to deduct the refinance points in full in the year paid. The court viewed the refinance as an integrated step in buying the home. However, the IRS did not accept this ruling nationally. It’s binding only in the 8th Circuit states. In most of the country, the IRS will still require amortizing refinance points. The case is a one-off exception; unless your facts are similar (temporary purchase loan followed immediately by planned refinance), don’t expect to deduct refi points upfront.

Kelly v. Commissioner (1991, Tax Court Memo): In this case, the homeowners refinanced their mortgage to get a lower interest rate (not part of any new purchase, just a rate reduction). They paid points and tried to deduct them immediately. The Tax Court denied it, holding that because the refinance was simply to obtain better loan terms and not to acquire or improve the home, the points were not currently deductible. This reinforced that refinance points must be amortized in normal situations, distinguishing Huntsman’s unique scenario.

Rev. Proc. 94-27 (1994): This isn’t a court case but an important IRS ruling. It outlines the safe harbor conditions under which a taxpayer can deduct points in the year paid. The safe harbor applies to points paid on a loan to buy or build a main home (and it also covers loans for substantial improvements). The five conditions mirror what we discussed: loan secured by principal residence, points are common in the area, etc. Crucially, this procedure explicitly excludes refinances (other than those improvement loans). It basically solidified the rule that, outside of a purchase or improvement, points must be spread out.

Tax Court Summary Opinions (various): There have been a few instances in summary opinions (which are not precedential) where taxpayers have challenged the refinance rules. For example, a 2005 summary opinion (Hurley) allowed refi points currently because the court was sympathetic to a narrow fact pattern. But since these are not official precedents, they don’t change the general rule. The IRS typically doesn’t budge unless a higher court forces it.

Pressman v. Commissioner (T.C. Summ. Op. 2022-15): This recent case highlights the importance of documentation. Pressman had a complicated setup where his home was in a corporation’s name and refinanced multiple times. He claimed a large mortgage interest deduction (around $75k) which the IRS disallowed due to lack of proof that he actually paid that interest. The Tax Court agreed with the IRS because Pressman couldn’t substantiate the payments (the mortgages were through his corporation, and records were poor). He was also hit with accuracy-related penalties. The lesson: even if an expense is theoretically deductible, you must be able to prove you paid it. Always keep good records of your refinance transactions.

Miscellaneous: Other cases have dealt with things like people trying to deduct loan origination fees as points when they were really fees (denied, since not true interest), or trying to add refinance costs to the home’s basis to reduce capital gains on sale (generally not allowed, as basis increase is for acquisition or improvement costs, not financing costs). The tax law and courts maintain a pretty clear line: refinancing is financing, not part of the property’s cost.

In short, court cases largely uphold the IRS’s interpretation of the law: refinancing costs give limited immediate deductions. One circuit court case provided an unusual exception, but unless you fall under that, the safe approach is to follow the standard rules (which we’ve outlined in detail above). The IRS, backed by courts, expects taxpayers to amortize what needs amortizing and to keep records. By doing so, you’ll avoid disputes and only deduct what you’re legally allowed.

Pros and Cons of Deducting Refinance Costs

Refinancing can have tax advantages, but it’s not all upside. Here’s a quick look at the pros and cons of refinance closing cost deductions:

Pros (Benefits)	Cons (Drawbacks)
Lowers your taxable income: Deductible costs like mortgage interest and points reduce the income you pay tax on, potentially saving you money.	Many costs aren’t deductible: The majority of refinance fees (appraisals, title, etc.) give no tax break – you pay them out of pocket with no relief.
Points = eventual tax savings: Even though you must amortize points, you do get to deduct them over time. Over the loan’s life you’ll recoup some cost via tax deductions.	Deduction spread over years: You don’t get an immediate large write-off for refinance points; the benefit trickles in slowly (e.g., a few dollars each year), unless you refinance again or pay off.
Rental/Business advantages: If this is an investment or business property, you can write off all refinance expenses (improving your rental/business cash flow after taxes). It effectively lowers the cost of borrowing.	Itemizing hurdle (personal): Homeowners only benefit if they itemize deductions. Many can’t itemize after the higher standard deduction – meaning a refinance might not yield any tax benefit at all for them.
One-time deductions on payoff: If you refinance again or sell, you can deduct remaining unamortized points in one lump sum, which can give you a nice extra deduction in that year.	Strict rules and potential errors: The rules on what’s deductible and how (amortize vs immediate) are strict. It’s easy to make mistakes, and an incorrect deduction can lead to IRS audits, penalties, or lost deductions if disallowed.
Interest still generally deductible: If you refinance to finance home improvements, the increased interest expense is usually fully deductible (subject to limits), which can help offset the cost of those improvements.	Limitations on interest deduction: The tax law caps how much mortgage interest is deductible (debt limit) and disallows interest on cash-outs used for personal reasons. You might not deduct as much as you think if your loan is large or you took cash out for non-home use.

As you can see, the tax benefits of refinancing exist but are relatively narrow. It’s often said, “Don’t refinance solely for the tax deduction,” because the deduction usually won’t outweigh the cost – it’s just a little sweetener to a deal that should make financial sense on its own. Still, if you’re refinancing for a good reason (lower rate, needed cash, etc.), you definitely want to take advantage of any deductions you’re entitled to, to soften the financial impact.

State-by-State Nuances in Refinance Cost Deductions

Federal tax law governs most of the rules we’ve discussed, but state income tax laws can differ. Some states mirror federal rules for mortgage deductions, while others have unique limitations or no deductions at all. Here are a few state-level nuances to be aware of:

State	State-Specific Nuances for Refinance Deductions
California	Generally follows federal rules for mortgage interest and property tax deductions. Notably, California did not adopt the lowered $750k mortgage limit from the 2017 tax law – it still allows interest on up to $1,000,000 of acquisition debt on your state return. So, Californians with big mortgages might deduct more interest on their CA taxes than on federal. Other refinance fees (points, etc.) follow the same deductible vs non-deductible treatment. California’s state income tax does not allow a deduction for state income taxes (you can’t deduct state tax against itself), but property taxes are deductible (and California doesn’t impose a SALT cap on its own return).
New York	New York also allows the older $1 million debt limit for mortgage interest on state returns. One quirk in NY: when you refinance, the state charges a Mortgage Recording Tax. This can be a hefty fee, but it’s not deductible as either a property tax or interest on your federal or NY state return. It’s considered part of the transaction cost. NY otherwise permits itemized deductions for mortgage interest and property taxes similar to federal (with a partial phase-out for very high-income taxpayers). Refinance points would be handled like federal – deductible over time if it’s your personal residence, or immediately if it’s for a rental reported on your NY return.
Texas	Texas has no state income tax. This means there is no state tax return and no opportunity (or need) to deduct mortgage interest or property taxes at the state level. The upside is you’re only dealing with federal rules. The downside is property tax in Texas is high, and while you deduct it federally (subject to the $10k SALT limit), you don’t get an additional break on a Texas return (since there isn’t one). Refinancing in Texas for personal use yields federal deductions only.
Florida	Florida, like Texas, has no state income tax. So, any refinance closing cost deductions are purely a federal matter. There’s no state income tax benefit for paying points or interest on a refinance. Floridians still pay property taxes (often through escrow) and deduct those on their federal return if itemizing, but Florida doesn’t tax income or offer deductions.
Massachusetts	Massachusetts does not allow a deduction for mortgage interest or points on its state income tax return for personal residences. MA’s tax system has a limited set of deductions (and a small “Circuit Breaker” credit for property taxes for seniors), but it doesn’t mirror federal itemized deductions. So, if you refinance your home in Massachusetts, you’ll get the benefit on your federal taxes (if you itemize) but no deduction on your MA state tax for that mortgage interest or points. (Exception: If that property is a rental or part of a business, the interest would be deductible as a business expense on the MA return, similar to federal treatment.)*
New Jersey	New Jersey also diverges from federal rules. NJ does not allow federal itemized deductions like mortgage interest or points on the state return. The only major home-related deduction NJ offers is for property taxes – you can deduct up to $15,000 in property tax on your NJ return (or take a smaller credit). But mortgage interest and points are not deductible in NJ. So, on a refinance, you wouldn’t get to deduct the interest or points on your NJ taxes (even though you still can on the federal return). The property tax you paid at closing could count toward that $15k property tax deduction limit in NJ, but the interest/points won’t affect NJ taxable income.
Illinois	Illinois doesn’t allow federal itemized deductions either. Instead, IL has a flat state income tax and offers a limited set of its own deductions/credits. Notably, Illinois provides a property tax credit (you can claim 5% of your primary residence property taxes as a credit against IL income tax). But it offers no deduction for mortgage interest or points on a personal residence. That means refinancing your home in Illinois won’t affect your IL income tax aside from possibly altering your property tax (which affects the credit). Rental property income in Illinois starts with the federal net income, so any refinance costs deducted federally for your rental would carry into IL’s calculation of taxable income.

(If your state isn’t listed, check your state’s tax rules. Many states allow mortgage interest as an itemized deduction if they have itemized deductions, but some impose their own limits or have no itemized system at all.)

The takeaway: Always consider state taxes when evaluating the benefit of a refinance. In high-tax states that allow mortgage deductions (like CA or NY), the combined federal + state tax savings on interest might be substantial. In states that don’t allow those deductions (like NJ, MA, IL), your benefit is only from the federal side.

FAQ: Deducting Refinance Closing Costs

Q: Can I deduct refinance closing costs if I don’t itemize my taxes?
A: No. If you take the standard deduction, you cannot separately deduct mortgage interest or property taxes from a refinance on your personal return. Only itemizers can claim those deductions.

Q: Are closing costs on a rental property refinance tax-deductible?
A: Yes. You can deduct essentially all refinancing costs for a rental property – interest, points, and fees – against your rental income. But you usually have to amortize (spread out) the loan fees over the loan’s term.

Q: I paid points to refinance my house – can I deduct the full amount this year?
A: No (in most cases). Refinance points on a personal home must be deducted over the life of the loan, not all at once. You’ll deduct a portion each year. Exception: If the refinance money was used to improve your main home and you meet IRS conditions, you may deduct that portion of points in the year paid.

Q: If I refinance and take cash out, is the interest on the extra cash still deductible?
A: No, not unless you use that cash for home improvements (or another deductible purpose). Interest on cash-out funds not used to buy or improve your home is not deductible as home mortgage interest under current law.

Q: Can I write off the appraisal, title insurance, or other fees from my refinance?
A: No. Fees for appraisal, title, attorney, closing, etc., are not tax-deductible for a personal residence refinance. They’re considered personal or capital expenses, not interest or taxes. (For a rental/business, you’d amortize these as part of loan costs, but you still wouldn’t deduct them outright in one year.)

Q: I refinanced again – can I deduct the remaining points from my last refinance now?
A: Yes. If you refinance with a different lender (or pay off the mortgage) before the old loan’s points are fully deducted, you can deduct any remaining unamortized points from that old loan in the year of the new refinance. (Make sure to also start amortizing any new points from the latest refi.) Note: If you refinanced with the same lender, you can’t deduct the old leftover points – they get added to the new loan’s points and amortized over the new term.

Q: Does refinancing my mortgage affect the $750,000 cap on interest deduction?
A: Not if you don’t increase your loan balance. If you refinance a mortgage that was previously grandfathered under the $1 million cap (from before 2018) and you refinance only the remaining balance, the grandfathering remains – you won’t be forced under the $750k limit as long as you don’t borrow more principal. However, if you do increase the loan (e.g. take cash out beyond what you owe), any interest on the new portion above your old balance falls under the post-2017 rules (only deductible if used for improvements, and overall subject to the $750k total debt limit). In short: Refinancing itself doesn’t reset your limit, but new debt beyond your old loan could be limited.