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You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally must deduct them over the life (term) of the mortgage.

Per IRS Publication 17 Your Federal Income Tax (For Individuals), page 156:

Points

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.

A borrower is treated as paying any points that a home seller pays for the borrower’s mortgage.

General Rule

You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally must deduct them over the life (term) of the mortgage.

Deduction Allowed in Year Paid

You can fully deduct points in the year paid if you meet all the following tests.

  1. Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid were not more than the points 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 in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage.
  9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s.

If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan.

Home improvement loan.

You can also fully deduct in the year points paid on a loan to improve your main home, if tests (1) through (6) above are met.

Amounts charged for services.

Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:

  • Appraisal fees
  • Notary fees
  • Preparation costs for the mortgage note or deed of trust

You cannot deduct these amounts as points either in the year paid or over the life of the mortgage.

Points paid by the seller.

The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.

For information about the tax treatment of these amounts and other settlement fees and closing costs, see IRS Publication 530 Tax Information for First-Time Homeowners.

To enter mortgage interest information, including points:

  1. From within your TaxACT return (Online or Desktop) click on the Federal Q&A tab
  2. Click Itemized or Standard Deductions to expand the category, then click Interest expenses
  3. Click Yes to enter information from Form 1098 and the program will proceed with the interview questions. If you paid points that were not reported on Form 1098, click No and then click Yes on the screen titled Itemized Deductions - Points Not Reported.

 


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