Mortgage Points And Tax Deductions
Points — or loan discount fees — are deductible in the year paid for financing used to acquire a personal residence.
Points paid to refinance a home must be paid out over the loan term. Example: if you refinance, get a 15-year, $100,000 loan and pay a point, $1,000, at closing, then you would deduct 1/15th of $1,000 each year. If you paid off the loan in 10 years, any remaining point costs are deductible in the year when the loan was repaid.
There is a catch to the general concept of points and deductibility: Imagine if you paid a point to finance and then, 10 years later, you refinance with the same lender. Can you claim the balance of that original point in the year you refinanced? The IRS says “no.”
“If you spread your deduction for points over the life of the mortgage,” says the IRS in Publication 936, Home Mortgage Interest Deduction for Use in Preparing 2003 Returns, “you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.”
Also, there are situations when points paid by a seller to help a purchaser buy a home may be deductible.
Please see a tax professional for specifics and the latest information.
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