Refinancing Interest

• When you refinance, you can deduct the interest charged on the amount of the refinance up to the amount you owed on your old mortgage at the time of the refinance as mortgage debt. The IRS limits this deduction to the interest on no more than $1 million of mortgage debt. If you file your taxes as married filing separately, the limit drops to $500,000 for each spouse.
  
  

Interest on Increased Mortgage Liability

• If you perform a cash-out refinance, where you borrow more than your current mortgage and receive the extra at the time of the refinance, or if you consolidate other debt into your mortgage, the extra debt does not count as mortgage debt unless you use it to improve your home. However, you can deduct the interest on up to $100,000 ($50,000 if married filing separately) of the debt as home equity debt because it is still secured by your home even though it is not used to buy or improve your home.
  
  

Points Over Time

• You can deduct any points that you pay on your refinance over the life of the refinance, not immediately. Points refer to costs paid at closing to reduce the interest rate on the loan. For example, if you pay $3,030 in points on a 30-year refinance, you would have to deduct $101 per year each year of the refinance rather than claiming a $3,030 deduction in the year of the refinance.
  
  

Prior Undedeucted Points

• If you previously refinanced your home, you may have been deducting points paid on that refinance each year. However, since you refinanced that mortgage, you may not have been able to deduct the full amount. For example, if halfway through your previous refinance you do your new mortgage refinance and you had paid $4,200 points, you would have only been able to $2,100 at that point. The remaining undeducted points, in this case $2,100, can be written off in the year you refinance.