Deducting Mortgage Points

In the Live Community,  lots of people have questions about deducting mortgage points. And I’m not surprised. Like many things in the tax code, there is a lot of confusion around mortgage points because there are a lot variables involved. This blog is written to answer those questions.

What are points?

In short, points refers to interest you pay up front in a mortgage rather than over the life of the loan. They usually allow you to have lower monthly payments. You might see them referred to in your mortgage paperwork as “loan origination fees” or “loan discounts.”

Can I deduct all the points in one year?

As a general rule of thumb, if this is your first mortgage, and you used it to buy or build the home you live in, then yes, you can deduct all the points in the first year. In addition, if you refinance your mortgage, or take out a home equity loan or home improvement loan for the purpose of improving your home, then you can often take the points of those loans off the first year as well.

Of course there are some other rules. For instance, in your paperwork, the points have to be calculated as a percent of your principal, rather than a flat fee. For a full list of requirements, see the IRS Chart on Fully Deductible Points

What if the seller paid the points on my loan?

Sometimes the seller offers to pay the points on a loan. The good news for buyers is that it’s the buyer who gets to take the deduction on the points. The same rules apply about whether you can deduct all the points in the year you paid them as if you paid the points yourself.

Note: the seller cannot deduct the points paid for the buyer; these points are considered selling expenses for the seller.

What if there weren’t enough funds provided to cover the points?

In the convoluted world of mortgage financing, there might be a case, for instance a zero-down payment loan, where points are deducted but then paid for by adding them to the principal of the loan.

The bottom line is that you can only deduct, up front, the points that were actually paid for by you or the seller. Here’s an example:  You were charged $2,000 in points on a new home loan in 2006. The seller paid for $1,000 towards your points and you provided a down payment of $750.  You can deduct fully $1,750 ($1,000 + $750) in points but you must deduct the remaining $250 in points over the length of the loan.

What about a home improvement loan or home equity loan?

In general, you can also fully deduct, in the year paid, points paid on a loan to improve your main home. If the loan is meant for other purposes, like paying for tuition or a car, you can only deduct the points over the life of the loan.

What about the points paid on my second home?

You cannot fully deduct in the year paid points you pay on loans secured by your second home. You still get to deduct these points only over the life of the loan.

What about the points on a refinanced loan?

In general, the points you pay to refinance a mortgage are not deductible in full in the year you pay them. The only exception to this is if you use the proceeds of your refinanced loan to improve your main home.

The good news is, if you’ve been deducting points over the length of your loan, in most circumstances, you can deduct the remainder of the points in the year that the related mortgage is paid off early due to prepayment, refinancing, or foreclosure.

What happens if the mortgage changes hands and I’m deducting the related points over the life of the loan? 

If the mortgage is sold to another lender, there is no change to your tax situation. You need to continue deducting your points over the length of your loan just as before.  Also, you can leave the original mortgage lender’s name to identify those points in TurboTax.

How do I enter my mortgage points in TurboTax?

Select the Federal Taxes tab (at the top of your screen), then select Deductions & Credits. Click on Find Deductions Myself. Under the Home section, click on the Start or Revisit button next to Mortgage Interest and follow the screens.

Can you explain the Home Loan Summary screen in the TurboTax Interview?

The Summary screen shows the information that you entered for each loan. It displays the mortgage interest paid for 2007 and the total points paid with that related loan, regardless if the points are amortized over several years. In the example below, mortgage interest paid for 2007 was $12,000 and the total points paid on that loan was $4,000.

For additional information on mortgage points, see IRS Publication 936

Print a copy of your 2006 tax return. Check Schedule A, line 12 for the amount of amortized points deducted for your 2006 tax return. In the example below, line 10 shows the $12,000 of mortgage interest and line 12 shows $400 as the 2006 amortized deduction of the $4,000 points.

   

Comments

[TurboTaxLee]

Comment on rental property and mortgage points. I'm assuming that your loan was only for your rental property. You can amortize your mortgage points by entering the points as another asset for your rental property. It's category type is amortizable intangible. (The very last type in the long list). The code section is 163. Once you enter that code section, the next screen will ask for the life of the loan. TurboTax will "deduct" the points over the life of the loan.

If this loan is split between your rental property and home, enter only portion for rental on Schedule E and the home portion with the other loans on your home (Schedule A).

[Mark Schaad]

How do I deduct the points over the life of the loan for my rental properties while using turbo tax Business? The Business section asks for the 1098 interest amounts but does not ask about the amortization of points. Do I enter these figures twice, once in the personal section and once in the business section???

[TurboTaxLee]

Thanks for the nice comment. It's always good to hear that my tax blogs are helpful.

[Johnny]

I must appreciate your work. from last couple of days i was searching for something interesting and this post is really nice.

Thanks for this nice post.

Johnny
http://www.perfectmortgagelender.com/