When mortgage interest rates are low, you might be eager to refinance your home loan. Refinancing at a lower interest rate will reduce your mortgage payment, but getting that lower rate will cost you in the form of closing fees. Most of the costs associated with refinancing, including state stamp taxes, are not tax deductible.
State Stamp Tax
If you remember your high school U.S. history, you know that the Stamp Act was one of the taxes that prompted the colonial demand of "No taxation without representation." In the contemporary U.S., we still have state stamp taxes, although they go by a number of different names in different states. Some states refer to this tax as a transfer tax, recording tax, mortgage tax, deed recording tax, documentary transfer tax or stamp tax. Regardless of what it is called, a stamp tax is a tax charged against either the transfer of property or on the document that is used to affect the transfer, such as a mortgage or deed.
A state stamp tax is part of the closing costs on a mortgage loan. Most states impose a stamp tax on original mortgages, and some impose the tax on mortgage refinances, although they might use a different formula to determine the amount of your tax stamp based on the difference between your original mortgage and your new mortgage. Additional closing costs might include attorney fees, title insurance, title search and document preparation fees. None of these closing costs are deductible on your federal income tax return.
Even though you can't deduct the cost of state tax stamps when you refinance your home mortgage, that expense is not a total loss. You can add the amount you paid for transfer or stamp taxes to the original purchase price of your home to increase your cost basis. This won't give you any immediate tax relief, but it will reduce the amount of any capital gains tax you might incur if you sell your home for a profit sometime in the future.
The only items that are tax deductible when you refinance your mortgage are your real estate taxes and your mortgage interest, including your loan origination fee, which is just another name for points, although you typically have to deduct your points over the life of your refinanced mortgage. You must itemize your deductions on Schedule A if you want to deduct your real estate taxes and mortgage interest.
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