Income Tax Deductions
Home Mortgage Points
The term "points" is
used to describe certain charges paid to obtain a home mortgage.
Points may be deductible as home mortgage interest if you itemize
deductions on Form 1040, Schedule A. If you can deduct all
of the interest on your mortgages, you may be able to deduct all
of the points paid on the mortgage. For information on deducting
interest, see Income
Tax Deductions: Home Mortgage Interest.
You can deduct the points in full in the
year they are paid, if
all the following requirements are met:
- Your loan is secured by your main home (your main home is the
one you live in most of the time)
- Paying points is an established business practice
in your area
- The points paid were not more than the amount
generally charged in that area
- You use the cash method of accounting. This
means you report income in the year you receive it and deduct
expenses in the year you pay them
- The points were not paid for items that usually
are separately stated on the settlement sheet such as appraisal
fees, inspection fees, title fees, attorney fees, or property
taxes
- You provided funds at or before closing, that
were at least as much as the points charged, not counting points
paid by the seller. You cannot have borrowed the funds from your
lender or mortgage broker in order to pay the points.
- You use your loan to buy or build your main
home
- The points were computed as a percentage of the principal amount
of the mortgage
- The amount is clearly shown on your settlement
statement
Points that do not meet these requirements
may be deductible over the life of the loan.
Points paid for refinancing generally can
only be deducted over the life of the new mortgage. However, if
you use part of the refinanced mortgage proceeds to improve your
main home and you meet the first six requirements stated previously,
you can fully deduct the part of the points related to the improvement
in the year you paid them with your own funds (for more information,
see Income
Tax Deductions: Home Refinancing Points). Points you pay on
loans secured by your second home, can be deducted only over the
life of the loan.
Points charged for
specific services, such as preparation costs for a mortgage note,
appraisal fees or notary fees are not interest and cannot be deducted.
Points paid by the seller of a home cannot be deducted as interest
on the seller's return, they are a selling expense which will reduce
the amount of gain realized. Points paid by the seller may be deducted
by the buyer provided the buyer subtracts the amount from the basis,
or cost, of the residence.
You
may be subject to a limit on some of your itemized deductions,
including points. For 2004, this limit applied if your adjusted
gross income was more than $142,700, or $71,350 if you were
married filing separately.
For details on deducting home mortgage points, see IRS
Publication 936: Home Mortgage Interest Deduction (PDF
139kb).
The information provided in this website is
not legal advice and should not be interpreted as legal advice.
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information in summary form. This information may not be comprehensive,
is subject to change, and may not apply to all individual circumstances.
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