When deducting mortgage points on your federal tax return, you must determine whether you can deduct the full amount in the year paid or if you must deduct them ratably (over the life of the loan). The deduction is reported on Schedule A (Form 1040), Itemized Deductions, specifically on Line 8c for points not reported on Form 1098.
Deduction in the Year Paid
You may deduct the full amount of points in the year paid if you meet all of the following tests (as outlined in Publication 530 and Publication 936):
- Your loan is secured by your main home (the home you live in most of the time).
- Paying points is an established business practice in your area.
- The points paid are not more than the amount generally charged in your area.
- You use the cash method of accounting (most individuals do).
- The points were not paid in place of separate fees (e.g., appraisal, title, attorney fees).
- The funds you provided at or before closing (including down payment, earnest money, escrow deposits) plus any points paid by the seller equal or exceed the points charged.
- You use the loan to buy or build your main home.
- The points are figured as a percentage of the mortgage principal and clearly shown on the settlement statement (e.g., Form HUD-1).
If all tests are met, you may choose to deduct the full amount in the year paid or spread it over the life of the loan. If you do not itemize deductions in the year you get the loan, you may still spread the deduction over future years when you do itemize.
Deduction Over the Life of the Loan
If you do not meet all the tests above, or if you choose not to deduct points in full in the year paid, you must deduct them ratably over the life of the loan. This applies to:
- Refinancing a mortgage (even if secured by your main home).
- Loans used for home improvements (unless part of proceeds were used for improvement—see below).
- Loans with terms over 30 years or not meeting other criteria in Publication 936.
To deduct ratably, divide the total points by the number of scheduled payments over the loan term. For example, with a 30-year mortgage (360 monthly payments), divide total points by 360 and deduct that amount each year. If you pay off the mortgage early, deduct any remaining points in that year.
Special Cases
- Refinancing with same lender: If you refinance with the same lender, you cannot deduct any remaining points in the year of refinancing. Instead, deduct them over the term of the new loan.
- Home improvement proceeds: If part of refinanced proceeds is used to substantially improve your main home, you may deduct the portion of points related to that improvement in the year paid. The rest is deducted ratably.
- Seller-paid points: The buyer treats seller-paid points as if they paid them. The buyer can deduct them in full if all tests are met; otherwise, they are deducted ratably. The buyer must reduce the home’s basis by the amount of seller-paid points.
- Funds provided less than points charged: If your funds at closing are less than points charged, you can deduct only up to your contribution (plus seller-paid points) in the year paid. The remainder is deducted ratably.
Reporting
Enter mortgage interest and points on the “Deductions” page under “Interest you paid” in tax software or on Schedule A, Line 8c. Points are typically shown on your settlement statement (not Form 1098).
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Disclaimer: Always verify details with current IRS forms, instructions, and your state’s Department of Revenue. Consult a CPA or tax professional for complex situations.