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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How to Deduct Your Mortgage Points

How to Deduct Your Mortgage Points

Buying a home is a huge financial responsibility. But it's a worthwhile investment. One smart way to kill two birds with one stone is to deduct your mortgage points from your taxes, as they are considered an itemized deduction.

The IRS understands the challenges of owning a home and allows homeowners to make deductions on some of the expenses involved with buying one. Although several factors determine how much a person can deduct, every homeowner can reduce the burden of payment of the loans by simply taking advantage of IRS homeowner rules.

What are Mortgage Points?

Home mortgage points, which can be factored into your taxes, are an amount equal to one percent of what you owe. They are mortgage interests and are usually paid up front. One point equals 1% of the mortgage loan amount. If your home loan is $75,000, you have a mortgage point of $750. You are allowed by the IRS to deduct the total amount of the points you pay that year as long as that mortgage is used to finance your primary residence. The deduction of mortgage points can reduce your taxes. 

To calculate the deductible points per year, divide the total cost by the term, in years, of your mortgage. If you pay $4,000 in points on a 10-year mortgage, you can deduct $400 each year.

In summary, if you paid mortgage points of $1,000  for a 10-year loan, you can deduct $100 every year from your income tax on your Schedule A.

If you want to use a mortgage to claim deductions from your taxes, you can do it in a straightforward procedure. You should realize that mortgage interests are deductible, so you can deduct all your points when you pay them with itemized deductions.

When you are paying your home loans, you'll be given Form 1098, in which you'll outline how many mortgage points you paid. This amount should be reflected in your Form 1040 Schedule A. You should, however, be careful in calculating your mortgage to arrive at the proper deduction.

However, there are some rules you must follow to benefit fully. Let's look at some of them.

  • The mortgage must be for a primary residence.

You can only deduct mortgage points on homes that serve as primary residences; that's the place you spend more time in. For secondary residences, points paid are deducted over the life of the loan.

  • Area rules must apply.

The points you pay must be consistent with what is produced in that area. You can only deduct in line with what is removed in an area. It shouldn't be way higher than the norm.

  • The points have to be paid directly.

You must pay the points directly to qualify for mortgage points deduction. You may pay in excess, but you can't claim points deduction by "borrowing" from the lender. Without paying the points, you can't have a points deduction.

In unfortunate circumstances, if the lender forecloses a payer's main home and cancels the remaining debt due to severe financial constraints, the IRS still views the debt as taxable. However, to avoid paying the extra taxes, using reliefs offered by the Mortgage Forgiveness Debt Relief Act, you can erase canceled mortgage debt from your income taxes as long as the erased debt isn't more than $2 million. Also, it must be established that the person can no longer afford the payments due to financial constraints. The person is then free from paying income taxes on the debt cancellation.



Jim McClaflin, EA, NTPI Fellow, CTRC
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