Deducting Mortgage Points
Third in a four-part series of tax tips for homeowners
If you itemize your deductions and can take the mortgage interest deduction on your federal income tax, you may be able to deduct the points you paid on your home mortgage, too.
Points are prepaid interest, so they get reported as home mortgage interest on Form 1040, Schedule A .
The total deductible points you paid during the year (along with the interest your paid) show up on the Form 1098 your lender sends to you.
The median tax deduction for home mortgage interest points was $509 in 2011, according to most recent IRS data.
You can typically deduct points in full in the year they're paid, if your meet all these requirements:
You can also fully deduct (in the year paid) points paid on a loan you used to improve your main home--if you met #1 through #6 above.
If you refinance and you use part of your loan to improve your main home, and you meet requirements #1 through #6, you can fully deduct the part of the points related to the improvement in the year you paid them.
If You Don't Meet The Requirements
If you don't meet the IRS' requirements (and this typically happens in a refinance) you may still be able to deduct your points over the life of your new mortgage rather than in a single year.
You can deduct the rest of the points over the life of the loan if you meet these requirements:
- 4 points, if your loan period is 15 years or less.
- 6 points, if your loan period is more than 15 years.
Other Pointers On Points
If you're a seller and you paid points for a buyer, you don't get to deduct those as interest on your tax return. But, you can count them as a selling expense, which can reduce your capital gain.
When a seller pays points for you as a buyer, you have to subtract the amount of those points when you calculate your basis or cost of the residence. You'll likely do that capital gains calculation when you sell the home many years from now, so be sure to file your settlement sheet where you can find it in the future.
Points you pay on a second home loans can generally be deducted only over the life of the loan.
When you're deducting points and your mortgage ends you can generally deduct any remaining balance in the year your mortgage ended. But, if you refinance with the same lender, you have to deduct the remaining balance over the life of your new loan. Mortgages end when you prepay, refinance, lose your home to foreclosure, or experience a similar event.
You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 Instructions.
If the mortgage you got to acquire your home was for more than $1 million or your home equity debt exceeds $100,000, you probably can't deduct all your mortgage interest or all your points. Read Publication 936, Home Mortgage Interest Deduction, to figure out how to deduct your points.
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.