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. Your loan is secured by your main home (your main home is the one you live in most of the time).
2. Paying points is an established business practice in your area.
3. The points paid were not more than the amount generally charged in that area.
4. 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.
5. The points were not paid for items such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. You use your loan to buy or build your main home.
7. The points were computed as a percentage of the principal amount of the mortgage.
8. The amount is clearly shown on your settlement statement.
9. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot 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 five 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, see Publication 936, Home Mortgage Interest Deduction. Publications can be downloaded from this site, or ordered by calling 1-800-829-3676.

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