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 170:
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. See Points paid by the seller, later.
You generally can't deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. See Deduction Allowed Ratably, next. If the loan is a home equity, line of credit, or credit card loan and the proceeds from the loan are not used to buy, build, or substantially improve the home, the points are not deductible.
For exceptions to the general rule, see Deduction Allowed in Year Paid, later.
Deduction Allowed Ratably
If you don't meet the tests listed under Deduction Allowed in Year Paid next, the loan isn't a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all of the following tests.
- 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. Most individuals use this method.
- Your loan is secured by a home. (The home doesn't need to be your main home.)
- Your loan period isn't more than 30 years.
- If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period.
- Either your loan amount is $250,000 or less, or the number of points isn’t more than:
- 4, if your loan period is 15 years or less, or
- 6, if your loan period is more than 15 years.
Deduction Allowed in Year Paid
You can fully deduct points in the year paid if you meet all the following tests.
- Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
- Paying points is an established business practice in the area where the loan was made.
- The points paid weren't more than the points generally charged in that area.
- 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. (If you want more information about this method, see Accounting Methods in chapter 1.)
- The points weren't 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.
- 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 aren't required 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 can’t have borrowed these funds from your lender or mortgage broker.
- You use your loan to buy or build your main home.
- The points were figured as a percentage of the principal amount of the mortgage.
- 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.
Note. 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 paid points paid on a loan to substantially improve your main home, if tests (1) through (6) are met. See IRS Publication 530 for details.
Amounts charged for services. Amounts charged by the lender for specific services connected to the loan aren't interest. Examples of these charges are:
- Appraisal fees.
- Notary fees.
- Preparation costs for the mortgage note or deed of trust.
You can't 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 Homeowners.
To enter mortgage interest information, including points:
- From within your TaxAct® return (Online or Desktop) click Federal. On smaller devices, click in the upper left-hand corner, then select Federal.
- Click Itemized or Standard Deductions in the Federal Quick Q&A Topics menu to expand the category, then click Interest expenses
- 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 Did you pay any points not reported on Form 1098?.