More mortgage Q&A: “Are mortgage points tax deductible?”
Mortgage points, otherwise known as loan origination fees or discount points, are tax deductible if certain conditions are met.
Generally, you cannot deduct the full amount of mortgage points in the year paid, as they are considered prepaid interest and must be deducted equally through the life of the loan, but there are exceptions.
According to the IRS, you can deduct the full amount of the mortgage points assuming all of the following conditions are met:
1. Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
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. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
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 Uniform 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.
Assuming you meet all these requirements (which isn’t too hard to manage), the mortgage points are fully tax deductible in the year the mortgage was taken out.
Only the first six requirements must be met for home improvement/refinance loans.
If you happen to provide funds at closing that are less than the mortgage points, you can only deduct up to the amount of funds you provided during the year the mortgage was taken out; the rest must be spread over the life of the loan.
For example, if you paid one point ($1,000) on a $100,000 mortgage, but only came in with $750 of your own funds, you could only deduct $750 in the year the loan was taken out, with the remainder spread over the life of the loan.
If the mortgage ends early due to a prepayment, refinancing, foreclosure, or a similar event, you can deduct the remaining amount in the year the mortgage ends.
If you don’t itemize your deductions in the year the loan is taken out, you can spread the mortgage points over the life of the loan and deduct in the future when you do itemize deductions.
Keep in mind that you can also deduct any mortgage points paid by the seller of the home, assuming you meet all the requirements listed above.
Note that costs such as appraisal fees, title and escrow fees, and notary fees are not interest, and are therefore not tax deductible.
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