The practice of paying "points" to secure a low interest rate on a home loan is an increasingly popular one. And at tax time, the benefits go beyond a low interest rate.
The IRS defines "points" as any extra charges paid by a home buyer at closing in order to obtain a mortgage. You might also hear them called discount points, loan discounts, loan origination fees, or maximum loan charges.
But they do have to be extra charges, so standard third party costs like appraisal fees, insurance costs, or government fees don't count.
Because points are usually paid in return for a lower interest ratehome, and you've got to be itemizing your tax deductions.)
Because you're paying these points all at once, it makes sense that they would be deductible in full the year that you pay them. And for most homeowners, they are. But there are restrictions. Specifically, in order to deduct your points in full this year, you must meet these nine requirements:
the cash method of accounting is reporting income the year it is received, and deducting expenses in the year they are paid.
- the mortgage is secured by your main home.
- the loan was used to buy or build your main home.
- points are an established practice in the area the loan is funded.
- the points paid are not more than usual in that area.
- the cash method of accounting is used.
costs can be appraisal fees, title search or insurance, attorney fees, or property taxes.
- the points are not paid in place of normally separate costs.
these funds can be money provided by you or the seller to close the loan and can includes the down payment and any escrow fees.
- total points paid are not more than the total un-borrowed funds.
This may seem like quite a list of restrictions, but most home buyers still qualify to take the deduction all at once.
- the points were computed as a percentage of the loan principal.
- points are listed as such on the mortgage settlement statement.
If you don't meet all the standards, you'll probably need to either spread the deduction out over the life of the loan, or reduce the total amount you claim as a deduction.
If you do qualify to deduct your points in full, but you're not itemizing this tax season, you're not out of luck.
The IRS recently stated that they will allow homeowners who didn't itemize the year they bought their homes to spread the points deduction out over the life of the loan (provided they itemize in those future years, of course).
And even if you are itemizing this year, you can still opt to spread the deduction out.