If you get a home loan one of the charges you'll likely have to pay your lender are "points." A point is equal to 1% of the loan amount—for example, one point on a $100,000 loan is $1,000. These charges are also called loan origination fees, maximum loan charges, or premium charges.
Some points are currently deductible (deductible in full the year you buy your home). Some are not.
Points are deductible as an itemized personal deduction on your IRS Schedule A the year you buy your home if the points are additional interest charged by the lender that you are prepaying. The IRS says that you can deduct such points in full in the year they are paid, if all the following requirements are met:
You can currently deduct all the points on your mortgage if you can deduct all the interest on your mortgage. You can do this provided that your loan is less than $1 million. If your acquisition debt exceeds $1 million, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.
Points paid for refinancing are deductible in a single year if you use the money to improve your main home—for example, add a new bathroom.
Points that don't constitute a prepayment of additional interest in the eyes of the IRS are not currently deductible. These include points charged for specific services such as preparation costs for a mortgage note, appraisal fees, notary fees, inspection fees, title fees, attorney fees, or property taxes. The IRS considers points paid for such services to be nondeductible "personal expenses."
Such points are deductible a little at a time over the life of the loan using the straight-line method--a process called amortization. With the straight-line method you deduct only a ratable portion of the total points paid each year. For example, if you paid $1,000 in points for services to obtain a 30-year mortgage, you would deduct 1/30 of $1,000 over 30 years--a deduction of $33 per year for 30 years ($1,000 ÷ 30 = $33.33).
Points paid by the seller of a home cannot be deducted as interest on the seller's return, but they are a selling expense which will reduce the amount of gain realized.