Dear Tax Talk,

Are points that are paid to buy down the interest rate tax deductible as itemized deductions in the year you bought the property?

— Howard

Dear Howard,

If you pay points in connection with the purchase of your principal residence, you should be able to deduct them on Schedule A as home mortgage interest. Points paid in connection with a refinancing of an existing residence or the purchase of an investment property are deductible over the term of the loan. The payment of points is the equivalent of prepaid interest, and generally will lower your interest rate on the loan.

Points may also be called loan origination fees, maximum loan charges, loan discount or discount points. Points are usually disclosed on Lines 801 and 802 of the standard HUD-1 settlement statement. The lender should disclose points paid during the year for the purchase of a primary residence on Form 1098.

To be deductible, the points must meet certain criteria. Usually the lender will evaluate the criteria when deciding whether to include the points on Form 1098. If the points were omitted from Form 1098, it can be as a result of not meeting one or more of the conditions listed below.

Criteria for deducting points:
  1. Your loan is secured by your main home.
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid were not more than the points generally charged in that area.
  4. You use the cash method of accounting.
  5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees and property taxes.
  6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage.
  9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s.

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