What can I deduct when refinancing rental property? (2024)

FAQs

What costs are deductible when refinancing a rental property? ›

The money you get from refinancing your rental property is not taxable since the IRS views this money as additional liability and not income. However, you cannot claim mortgage interest deductions for expenses not related to buying, building, or substantially improving a property.

With any mortgage—original or refinanced—the biggest tax deduction is usually the interest you pay on the loan. Generally, mortgage interest is tax deductible, meaning you can subtract it from your income, if the following applies: The loan is for your primary residence or a second home that you do not rent out.

In fact, making changes to financing may help to increase cash flow and scale up to grow a rental property portfolio. Here are some of the main reasons and potential advantages for refinancing a rental property: Lower the loan interest rate and monthly mortgage payment amount.

Typically, the only closing costs that are tax-deductible are payments toward mortgage interest, buying points or property taxes. Other closing costs are not. These include: Abstract fees.

What deductions can I take as an owner of rental property? If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

You can only deduct closing costs for a mortgage refinance if the costs are considered mortgage interest or real estate taxes.

Unlike your primary residence, where you can only deduct qualified points and interest, you can deduct all costs associated with obtaining a new mortgage for your rental property. Typical loan-related expenses include: Points. Loan origination and loan assumption fees.

Deductibility of Real Estate Appraisal Costs

Unfortunately, in most cases, the cost of a real estate appraisal cannot be directly deducted on your taxes. The Internal Revenue Service (IRS) considers appraisal fees as personal expenses rather than deductible business expenses.

Investors are normally required to wait six months before refinancing a rental property. However, the delayed financing exception allows real estate investors who originally purchase a rental property with cash to do a cash-out refinance within a few days of closing on the all-cash purchase.

Can you cash-out refinance an investment property? ›

To qualify for a cash-out refinance on an investment property, you'll need to have sufficient equity in your home. Equity is the difference between the current value of your home and your outstanding mortgage balance. Lenders typically require a minimum of 20–30% equity in the property to approve a cash-out refinance.

Refinancing an investment property is similar to refinancing a mortgage on your primary residence. This might be a good option to secure a lower interest rate or change your loan terms. Plus, using a cash-out refinance or home equity loan could allow you to take money out of your accumulated home equity.

If you refinance with a new lender, you can deduct the remaining mortgage points when you pay off the loan. However, if you refinance with the same lender, you must deduct the remaining points over the life of the new loan. You might be able to claim a deduction for points paid.

Deductibility of Real Estate Appraisal Costs

Unfortunately, in most cases, the cost of a real estate appraisal cannot be directly deducted on your taxes. The Internal Revenue Service (IRS) considers appraisal fees as personal expenses rather than deductible business expenses.