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Mortgage points pay off at tax time when buying or
refinancing a home
By Kay
Bell • Bankrate.com
Did this year's historically low mortgage rates persuade
you to buy, build or refinance a home? Then you probably already
know of the tax advantage that mortgage interest can provide.
But many homeowners overlook the tax break available
for points paid to get a home loan. In some cases, points also could
shave tax bills for folks who refinanced or got an equity loan or
line of credit.
Each point is 1 percent of the loan amount. Lenders
charge points as a way to make a profit and borrowers generally
pay points in exchange for lower mortgage rates.
If you paid points, the amount should be listed on
the 1098 statement from your lender. This document also notes how
much mortgage interest you paid. Both of these deductible amounts
go on line 10 of Schedule
A. (If the points aren't on that statement, but show up elsewhere
-- for example, on your closing documents -- enter them on line
12. Check the Schedule A instructions
for details.)
Getting the maximum deduction
On a conventional mortgage (usually a fixed-rate, 30-year loan that
is not insured by a federal agency), points may be paid by either
buyer or seller or split between them. Even if the seller pays all
the points, the buyer gets the deduction. Exactly how much of one
and when depends on the loan circumstances.
Loan points are fully deductible in the year paid
if they meet all these requirements:
- The loan is secured by your main home, the house
you live in most of the time.
- Paying points is an established business practice
in your area.
- The points are generally what is charged in your
region.
- You use the cash method of accounting: You report
income in the year you receive it and deduct expenses in the year
you pay them. Most individuals do this.
- The points are not paid in place of amounts ordinarily
stated separately on the settlement sheet. That is, you cannot
pay points in exchange for lower or no appraisal fees, inspection
fees, title fees, attorney fees and property taxes.
- The funds you come up with at or before closing,
plus any points the seller pays, must be at least as much as the
points charged. The money does not have to apply just to the points.
It can include a down payment, escrow deposit or earnest money.
But it all must come to at least as much as the points. For example,
you took out a $100,000 mortgage and were charged $1,000 (one
point). However, your lender only required a $750 down payment.
In this case, you cannot deduct the full $1,000 points payment,
only $750 of it. The remaining $250 must be deducted over the
life of the loan. And you cannot have borrowed any of the money
you paid at closing from your lender or mortgage broker.
- The loan is used to buy or build your main home.
- The points are computed as a percentage of your
mortgage's principal amount.
- The amount is clearly shown on the settlement statement
as points charged for the mortgage. The points may be shown as
paid from either buyer or seller funds.
Refi points
While points-deductibility definitely is a tax-saving option buyers
should explore any time they get a loan to buy another home, a taxpayer
who simply refinances also might be eligible for this tax break.
In these cases, a homeowner can fully deduct points in the year
paid on a refi loan as long as he meets tests 1 through 6 listed
above. If you also take advantage of the refinanced mortgage to
get a little cash secured by your property, the extra money must
be used to improve your primary residence.
The same rules apply to home equity loans or home
equity lines of credit. When the loan money is used for work on
the house securing the loan, the points are deductible in the year
the loan is taken out.
If, however, you use the extra refi or home equity
cash for something else, such as paying college costs or buying
a car, you still can deduct the points but not completely on one
tax return. The points deductions must be parceled out over the
equity loan's term.
To figure the annual deduction amount, divide the
total points paid by the number of payments to be made over the
life of the loan. You should be able to get this information form
your lender. For example, a homeowner who paid $2,000 in points
on a 30-year second mortgage (360 monthly payments) could deduct
$5.56 per payment, or a total of $66.72 for 12 payments.
When the loan is tied to a property that is not your
main residence, the points cannot be fully deducted in the year
the loan was made. Points paid on a loan secured by a second home
or vacation residence, regardless of how the cash is used, must
be amortized over the life of the loan.
More homeownership tax advantages are discussed in
this Bankrate.com article
and our Tax
Basics. If you want the technical scoop straight from Uncle
Sam, check out Internal Revenue Service Publication
530, Tax Information for First-Time Homeowners, and Publication
936, Home Mortgage Interest Deduction.
If you haven't yet bought your dream house but are
considering it, let Bankrate's "How
Do I Buy My First Home?" feature be your guide.
-- Updated: Nov. 14, 2003
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