Mortgage Points Deduction

Most American taxpayers like you know that mortgage interest is deductible, but did you know that mortgage points are also deductible? If you paid points to a lender in exchange for a lower interest rate on your home mortgage, you may be able to make a mortgage points deduction.

Mortgage points are considered prepaid interest on your mortgage if you itemize your deductions. This means that mortgage points will be deducted the same way that home mortgage interest is deducted. Mortgage point deductions should be entered on Line 20 of Schedule A on your 1040 tax return. In cases where the points are paid by the home seller or split between the buyer and the seller, the buyer gets to take the deduction.

If your mortgage debt is greater than $1,000,000, or if your home equity debt is greater than $100,000, you will not be able to deduct all of your points. Otherwise, you will be allowed to deduct 100% of your mortgage points if you are allowed to do the same for 100% of your mortgage interest.

You must meet several requirements in order to qualify for a mortgage points deduction on points paid to improve your home:

  • The loan that you paid points on must be secured by the home you live in most of the time.
  • Like most taxpayers, you must report income in the year you receive it which is known as cash method accounting.
  • The points you paid did not go towards paying separate taxes, fees, or preparation costs.
  • The down payment and other funds you paid at closing must be as least as much as the points.
  • You did not borrow money elsewhere to pay for the points.
  • Paying points is normal where you live and you did not pay more than what is normally charged in your area.

To get a mortgage points deduction on the purchase, not improvement, of your home you must meet the above requirements plus the following requirements:

  • The loan that you paid points on must be for the home you live in most of the time.
  • Your final closing statement shows the points you paid and were calculated as a percent of your principal.

Make sure to talk to your tax advisor for help in maximizing your mortgage points deduction.

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