Are points tax deductible?
"Points" are considered prepaid, home mortgage interest by the
Internal Revenue Service. In the loan industry, they are also
referred to as discount points, origination fees, maximum loan
charges or loan discount. They are usually fully tax deductible in
the case of a home purchase, construction of a home, or home
improvement. This article addresses the tax deductibility of
points associated with a home purchase. For complete information
about home mortgage interest, go to
www.irs.gov, or contact your tax advisor.
In order to deduct home mortgage interest, these three conditions
must apply to you:
- You file Form 1040 and itemize your deductions on Schedule
A.
- You are legally obligated to repay the loan. If you make
mortgage payments for a friend, and you're not legally required
to make the payments, you can't deduct the interest.
- The mortgage must be secured on your main or second home.
Generally, you must deduct points over the life of the loan. I.e.,
for a 30-year loan, you may deduct 1/30 of the points each year.
In the event you still have a loan balance when you sell your
home, you may deduct the balance of the points not previously
deducted. If your mortgage ends, and the full amount of the points
have not been deducted, you may deduct the balance of the points
when the mortgage ends. If you refinance your loan with the same
lender, you can't deduct the balance of the points in that year.
Instead, you must deduct them over the life of the new loan.
For the tax year in which you purchased your home, you may deduct
the full amount of the points you paid for a home purchase if all
these conditions apply to you:
- Your loan is a lien upon (secured by) the home you live in
most of the time (main home).
- Paying points is the norm for the area in which your loan
was made.
- The amount of points paid were not excessive for the area in
which you obtained your loan.
- You use the cash method of accounting (most people do).
- The points were not paid in lieu of other fees, such as
appraisal, title, attorney, etc.
- The purpose of your loan was to buy the home you live in
most of the time.
- The points were based upon a percentage of the loan amount.
For example, 1% loan fee.
- The amount and type of charge is explicitly stated as points
in your closing documents (Uniform Settlement Statement, Form
HUD-1). Points are deductible on your tax return if the Seller
pays them.
- The total amount of money you paid to close the loan (not
borrowed from the lender), including your down payment, title,
escrow, closing agent fees, etc., must be at least as much as
the points charged. These funds, however, do not have to have
been applied to paying points.
The information contained herein is intended for
general information purposes only. This information is not tax
advice, nor should any actions or decisions be based upon any
information contained herein. For tax advice, consult your tax
advisor. |
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