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Deduct your mortgage points

Get a mortgage to buy a house recently? Don't worry, the IRS already knows all about it. Banks and other lenders report the points you pay to purchase your main home on Form 1098, the Mortgage Interest Statement.

Some new homeowners can deduct points paid on home mortgage loans in the year paid. There are five requirements that a taxpayer must meet, and we'll be considering the deductibility of points paid for a variety of different home loans. Even if the seller paid the points, you may still qualify for the deduction.

Requirements

You can deduct points if you meet the following five requirements:

  • Your settlement statement clearly identifies the amount of points.
  • The points are computed as a percentage of the mortgage loan principal.
  • The amount paid as points doesn't exceed the normal rate charged in your area. If it does, the excess amount is amortized over the life of the loan.
  • The points are paid on a loan to purchase or build a principal residence, and your residence secures the loan.
  • The points are paid directly from your own savings. You can't deduct points paid through the loan proceeds. In other words, you pay the points as part of your down payment on or before the closing date of the mortgage. Any points paid from loan proceeds are amortized over the life of the loan.

Your down payment counts as a payment of points if it equals or exceeds the amount of points. For example, you pay points of $1,000. As long as your down payment equals or exceeds $1,000 and assuming you meet the other requirements, the points are fully deductible.

Other types of loans

Home Improvement -- Points are fully deductible in the year they were paid if the improvements were on your principal residence.

Refinancing -- Points paid on refinancing your home mortgage are amortized over the life of the loan. You can deduct some points if you use the loan proceeds to substantially improve the principal residence. If only a portion of the loan is for improvements, only the corresponding portion of points is deductible in the year paid. If you pay off your loan early, any non-amortized points as of the date of the payoff are deductible in full for the year of the loan payoff.

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Home equity line of credit -- Points paid initially for a line of credit secured by your home are amortized over the life of the credit line, i.e., until the credit line expires. Again, similar to refinancing points, if part of the loan is used for home improvements, that portion of the points is fully deductible in the year paid.

Second residence -- You can't deduct the points in full, but you may be able to amortize the amount over the life of the loan. That means deducting only a small portion each year.

Vacation homes -- The deductibility depends on whether you live in the vacation home or rent it out. If the home is strictly for personal use, points paid on a loan to purchase or improve the home are amortized over the life of the loan like a second residence. If the home is rented for all or part of the year, the points are still amortized over the life of the loan, but this amortization is instead reported on Schedule E, Supplemental Income or Loss.

Points are deductible even if paid by seller

This deduction on points applies even if the seller paid them. Sounds too good to be true? Consider the perspective of the IRS. The seller paid the points to you, and you are deemed to have paid the points to your lender.

Here are the requirements for deducting seller-paid points:

  • Your settlement statement indicates a credit given to the seller for the points.
  • The points are computed as a percentage of the mortgage loan principal.
  • The amount paid as points doesn't exceed the normal rate charged in your area.
  • The points are paid on a loan to purchase or build your principal residence, and your residence secures the loan.
  • Your down payment must at least equal the amount of seller-paid points you are deemed to have paid.

Your basis in your home is reduced by the amount of deductible seller-paid points. Similarly, the seller's sales price is reduced by this amount.

-- Posted: March 23, 2000

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