A couple of notes here. First, the Hurleys followed the cardinal rule of dealing with the IRS: They kept copious records detailing their deduction-related expenditures.
Secondly, and more importantly for the rest of us, the ruling sets no tax-law precedent. The judge issued what is known as a summary opinion, a ruling that is not treated as the basis for future tax arguments.
However, the Hurleys' persistence shows that it is possible to fight the IRS and win, as long as you go in prepared, are patient and have the means to hire a good tax attorney. Who knows? Another tax court judge might just have the same point of view as the one who heard the Hurleys' case.
Serial refinancing
Amortizing also comes into play for serial refinancers -- homeowners who take repeated advantage of low mortgage rates to get better and better home loans. This was a common practice at the housing boom's height, but some borrowers still redo their loans more than once to get better interest rates or a different type of loan product. The good news for most homeowners is that they don't lose that portion of the first refi's points that they've been amortizing.The IRS says you can deduct any remaining balance of the points in the year the mortgage ends, either due to a prepayment, refinancing, foreclosure or similar event. Say, for example, our hypothetical refinancer got his loan three years ago. It was a 30-year loan, so he deducted $50 in points on his last three tax returns. Now he decides to refinance again because rates are even lower. Since the first refi is paid off via the second refi, he probably can deduct the remaining $1,350 in points on his next tax return.
But, this immediate, and often large, points tax break doesn't apply in every case. If, for instance, the second refinancing is with the same lender, the IRS says you cannot immediately deduct any remaining balance of your first refi's points. Instead, the remaining points balance from the first refi is added to your new refinance amount. You then continue to deduct them, along with any points from the second refi, for the life of your new loan.
So while points paid on refinanced loans usually don't provide immediate tax breaks, even when amortized they can save you some tax dollars. You can learn more about the tax benefits of owning a home in Bankrate's homeownership "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, and if you want to know if paying points makes sense for you, see "Paying mortgage points: a primer."
If you haven't yet bought your dream house but are considering it, let Bankrate's "Mortgage Basics" feature be your guide.