Deducting Mortgage Points When You Buy a House

Not all mortgage points are tax deductible

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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.

Currently Deductible Points

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 use your loan to buy or build your main home (your main home is the one you live in most of the time)
  • your loan is secured by your main home--that is, your lender can foreclose on your mortgage if you don't pay it
  • paying points is an established business practice in your area
  • the points paid were not more than the amount generally charged in that area
  • you use the cash method of accounting (this means you report income in the year you receive it and deduct expenses in the year you pay them--all individual homeowners use this method)
  • the points were not paid for services performed by the lender or others that usually are separately stated on the settlement sheet--for example, appraisal fees, inspection fees, title fees, attorney fees, or property taxes
  • the points are paid directly by you to your lender from separate funds--you cannot borrow the funds from your lender or mortgage broker in order to pay the points
  • the points were computed as a percentage of the principal amount of the mortgage, and
  • the amount is clearly shown as points on your settlement statement.

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 Are Not Currently Deductible

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.

For more on the subject, see IRS Publication 936, Home Mortgage Interest Deduction. For a detailed discussion of financing your home, see Nolo's Essential Guide to Buying Your First Home.

by: , J.D.

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