Fiscal Tax Blog

When home buyers purchase mortgages, they pay points, which are charges the home buyer pays to obtain a mortgage. A point is generally 1% of the loan amount. The amount paid for points when buying a house or when refinancing an existing mortgage is tax deductible, in most cases.

To receive a mortgage point deduction on taxes, a taxpayer must itemize and use Form 1040 and write the deduction for mortgage points on Line 11 of Schedule A. As with any IRS approved deduction, records of payments are a must.

Generally, the deduction for points must be spread out over the life of the loan, but in some cases, the full amount of the points can be deducted in the year the mortgage was secured. To qualify for deducting the whole amount of the mortgage points in one year, the IRS has nine criteria a tax payer must meet. Two of the criteria are that the tax payer must be securing a loan for a primary residence and the total amount of the points must not exceed the funds paid at closing. The other seven criteria are listed at www.irs.gov/taxtopics under Topic 504 Home Mortgage Points.

If tax payer doesn’t meet the nine criteria, the amount paid for points can still be deductible over time. That means a percentage of the points’ amount can be deducted each year over the life of the mortgage. Mortgage points paid for vacation homes or second homes must be deducted over time. Similarly, the deduction for points paid for refinancing an existing mortgage are spread out, except when home improvements are involved. To figure out the amount of the deduction, divide the points’ amount by the number of payments to be made. For example, a home buyer obtains a $150,000 loan and pays two points worth $3000 on a twenty year mortgage. On a 20 year mortgage, there are 240 payments. This means $12.50 can be deducted for each payment. In a year of twelve payments, $150 can be deducted from taxes on a yearly basis.

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