The term points is used to describe certain charges paid by a borrower to obtain a home mortgage. Points may be deductible as home mortgage interest.

Points are fully deductible in the year they are paid, if they meet all the following requirements:

1. The points must be paid to buy or build your main home.
2. Paying points must be an established business practice in your area, and the points paid must not be more than the amount generally charged in that area.
3. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
4. The points were computed as a percentage of the principal amount of the mortgage.
5. The points were not paid for items such as appraisal fees, inspection fees, titles fees, attorney fees, and property taxes.
6. The amount must be clearly shown on your settlement statement.
7. The funds you provided at or before closing plus any points the seller paid, were at least as much as the points charged. You can not have borrowed the funds from your lender or mortgage broker.

Points that do not meet these tests may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the term of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first four tests stated previously, you can fully deduct the part of the points related to the improvement in the year paid. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the sellers return but can be claimed as a selling expense which will reduce the amount of gain realized. Points you pay on loans secured by your second home, can be deducted only over the life of the loan. For more information on points, order Publication 936, Home Mortgage Interest Deduction, by calling 1-800-829-3676.

Tax Topics & FAQs | Tax Help Archives | Home