Can HUD Refinance Fees Be Deducted on Federal Taxes?

by Wilhelm Schnotz

As you almost certainly learned when you closed on your original mortgage, closing on a house can be a considerable expense, with closing costs, commissions and other fees adding to the financed cost of your home. In many situations, you must cover these charges at closing, and can’t extend them over the life of your home loan. When refinancing your home with a loan from the Department of Housing and Urban Development (HUD), you receive the same tax treatment as refinancing with a non-HUD backed mortgage.

Settlement Fees and Deductions

Brace your pocketbook to take a hit when you refinance your home through HUD: As with all other mortgage closings, be they original or refinanced, the costs associated with HUD loans -- closing fees, inspection fees, attorney and titling fees -- can’t be claimed as a deduction if they’re connected to a home in which you’ll live. Those costs are deductible against rent income if you refinance an investment property, but HUD loans require you to live in the home in which you refinance.

Adjusting Your Home's Gains Basis

You won’t be able to put your closing fees to work reducing your taxes in the year your close on your HUD refinancing, but they’re not totally lost as a write-off. When you sell your home, the Internal Revenue Service (IRS) allows you to roll closing and settlement fees into the overall cost you paid to purchase your home. This cost, known as the property’s basis, is essential in computing capital gains taxes, taxes on profit made by selling a home. Additionally, if you made any improvements to your home using HUD’s 203k lending program, those improvements also increase your investment in the home.

Gains on Refinanced Homes

While it may be several years before you realize the tax benefits from refinance fees, don’t lose track of those costs. Applying the settlement fees to your home’s basis increases your investment in your home, potentially reducing capital gains taxes. The IRS charges gains taxes -- usually at 15 percent if you owned the home for more than a year -- on the difference between the basis and its resale value. While the IRS allows single homeowners a $250,000 and married homeowners a $500,000 exemption on gains on a primary residence, homeowners who live in their home for a long time in an active real estate market may still be able to capitalize on the increase in their home’s basis from settlement fees.

Deducting Points

The IRS allows homeowners who refinance to deduct the cost of purchasing points. Unlike purchases of points for an original purchase, refinancers must amortize the cost of the points over the life of their loan, and make yearly deductions based on that schedule. For example, if you spend $5,000 to purchase points on your 30-year HUD refinance, you may deduct each monthly payment of $13.89 -- $5,000 divided by 360 payments -- at the end of the year, or $166.68 annually.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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