GUIDELINES FOR DEDUCTING MORTGAGE POINTS
If you’ve recently purchased a new home, you may be wondering if you qualify for a full tax deduction for “points” (a portion of the loan amount of usually 1, 2, or 3%) paid to your mortgage lender. Generally, points are prepaid interest, and they may be deductible as home mortgage interest, if you itemize deductions.
The Internal Revenue Service (IRS) states that points are deductible in the year of actual payment, as long as all of the following conditions are met:
1) The loan is secured for your primary residence (the one you live in most of the time).
2) Paying points is an established business practice in the area where the loan was made.
3) The points paid were not more than the points generally charged in that area.
4) You report income in the year you receive it and deduct expenses in the year you pay them, which is also known as the cash method of accounting. Most people use this method to calculate their income tax liability.
5) The points paid were not in place of amounts that are ordinarily stated separately on the settlement statement at the time the loan is closed. For example, you cannot pay points in exchange for lower or no appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
6) The funds you provided at or before the time of closing, plus any points the seller may have paid, were at least as much as the points charged. The funds you paid do not have to have been applied to the points. They can include a down payment, escrow deposit, or funds you paid at or before the closing for any purpose. However, such funds may not have been borrowed from your lender or mortgage broker.
7) The loan is used to buy or build your primary residence.
8) The points were computed as a percentage of the principal amount of the mortgage.
9) The amount paid for points is clearly marked on the settlement statement as such. The points may be shown as paid from either your funds or the seller’s funds.
If you meet all of the conditions stated above—and you itemize your deductions in the year in which you obtain your loan—you can either deduct the full amount of points in the year they are paid, or you may extend the deduction over the life of the loan. If you don’t itemize your deductions, you may then spread the deduction out over the life of the loan. If you’re spreading the points deduction out over the life of the loan, and your mortgage ends earlier than the original loan term (through prepayment or refinancing), you may deduct any remaining balance in the year your mortgage ends. If your loan is for home improvement or if you used refinanced mortgage proceeds to improve your primary residence, you may fully deduct the points paid in the year they are paid, as long as you meet conditions 1 through 6 above.
In many cases, the tax deduction for points paid may be available. If you’ve bought or sold your primary residence, taken out a home improvement loan, or refinanced a mortgage, be sure to consult one of our qualified tax professionals, who can assist you in determining whether your mortgage points paid meet the deductibility criteria.