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 Your Best Homeowner Tax Return

   February 2015

 
 
 

Your Best Homeowner Tax Return: 
How To Deduct Mortgage Points
 
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 you paid) show up on the Form 1098 your lender sends to you.

You can typically deduct points in full in the year they’re paid, if you meet all these requirements:

1. The mortgage was for your primary home.
2. Paying points is an established business practice in your area. 
3. The points you paid were typical for your area. 
4. You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).  
5.  The points you paid didn't cover services or products that show up on your loan settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees or property taxes.
6.The points you paid at or before closing, plus the points the seller paid, were at least as much as the points charged.  You didn't borrow money from your lender or mortgage broker to pay the points.
7. You used your loan to buy or build your primary home.
8.The points were computed as a percentage of the principal amount of your mortgage.
9.The amount is clearly shown as points on your settlement statement.

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:
  • You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).
  • Your loan is secured by a home. The home does not need to be your main home.
  • Your loan is for not more than 30 years.
  • If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period.
  • Either your loan amount is $250,000 or less, or the number of points is not more than:
    • 4 points, if your loan period is 15 years or less.
    • 6 points, if your loan period is more than 15 years.
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.

Source: Coldwell Banker Your Home Action Update
  Barbara Allen

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