refinance

PITFALLS TO AVOID WHEN REFINANCING When you go to refinance your home, there are a couple of things to be aware of or you could be facing an unintentional tax liability. The government realizes you get a big tax advantage with your mortgage deduction and they want to prevent "double benefits".

Therefore, there are two types of investments that you can't buy with mortgage refinance proceeds: those that are tax-fee or tax-deferred. This means you can't use the mortgage money to buy tax-deferred annuities or tax-free municipal bonds or make IRA/ROTH IRA contributions. The IRS does not want you to enjoy a tax deduction on the mortgage and then use the money to make an investment in securities that let you earn interest or profits that aren't taxable.

The key to avoiding the tax liability if your plan is to make a tax-deferred or tax-free investment with your mortgage is the money trail. It's okay to buy these investments, just be sure you can prove the money for those investments came from your earned income or some other source. Other you'll lose you tax deduction for your mortgage interest and that could cost you a fortune in the long-run.

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