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With interest rates steadily increasing, more and more borrowers are considering refinancing early into a low rate and paying the prepayment penalty. The strategy isn’t for everyone, and generally only works if the borrower is looking to pull equity out of the property. However, there is one big benefit that seems to fall under the radar: a tax write off. Prepayment penalties are tax deductible in the State of California and at the federal level, meaning that the penalty could be reduced by half for borrowers in the top tax brackets.

“For both federal and state tax purposes, prepayment penalties are tax deductible against ordinary income,” Michael T. Elmore, EVP and managing director at NorthMarq Capital, tells GlobeSt.com. “In California with high-income owners—with a federal tax rate of 37% and the state tax rate is 13.3% at the margin—the federal and state government are giving you half of the money back as a write off against your ordinary income.”

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.

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