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How to Deduct Your Mortgage Points

How to Deduct Your Mortgage Points

If you have availed a home loan, you are entitled to claim an Income Tax deduction called a home mortgage point. The deduction will be the equivalent of one percent of the loan amount. Thus, a home loan of $850,000 will entail a home mortgage point of $8,500.

Two kinds of points are used by the home mortgage industry, namely, discount points and origination points. The loan originator can deduct the whole of the origination points. By contrast, discount points – which are defined as a kind of prepaid interest -- can only sometimes be deducted in their entirety.

How to Qualify for a Deduction

You can legitimately deduct the entire amount relating to your points from the return of the tax year during which you receive them. There are limits to the amount you can deduct by way of mortgage points if you have borrowed more than $1 million as home loan. Note: From tax year 2018 onwards, such limits will apply to home loans in excess of $750,000. You would also need to satisfy additional requirements imposed by the IRS before you can seek deductions of mortgage points:

  • You must use the mortgage for the purchase or construction of your primary residential home.
  • Your deduction must represent a proportion of your mortgage amount.
  • Business practice in your area of residence must normally include the use of points.
  • The points you have paid must be considered reasonable for your area
  • Ensure the use of cash accounting on your taxes.
  • Amounts spent on property taxes and other fees usually considered stand-alone cannot be accounted as mortgage points.
  • If you have taken a loan to help pay for the mortgage points availed from a broker or lender, you cannot claim a deduction of such points.
  • You must itemize any amount paid as mortgage points, in an unambiguous manner.
  • Any mortgage points that cannot be deducted in the year you paid them could still be deducted legitimately over the remaining tenure of your home loan.

If you wish to file a return and claim a deduction by way of mortgage points, you will find the process quite simple. You must itemize the amount and claim the deduction by filling up Schedule A of Form 1040. Specifically, you must follow this procedure:

  • You can obtain Form 1098 from your lender: the form will display the amounts spent on mortgage interest and mortgage points.
  • Fill in the amount in Schedule A of Form 1040, at line 10.
  • It’s quite possible that Form 1098 may not include some of the points; in such an event, use line 12 in Schedule A of form 1040 to fill in the additional amount spent.

As you can see, claiming mortgage point deductions can be a simple process. However, some taxpayers may struggle to calculate and deduct mortgage points. If you need help with the calculation or in filing taxes overall, don’t hesitate to consult a tax professional.

Accrual of Benefits 

An average home buyer would like to negotiate the best possible price for his ideal home. So, it may seem counter-intuitive for a home buyer to have to incur additional costs. But when you consider that the loan rate could reduce by 0.25% for every discount point paid upfront, such additional costs no longer seem illogical. For instance, if the mortgage lender is charging you an interest rate of 4%, payment of two points upfront could cause the rate to drop to 3.5%, a reduction of 0.25% for each point. Additionally, you can claim a deduction on your tax return for those points. The lengthier your planned stay in the mortgaged home, the greater the benefits you could avail via upfront payment of mortgage points as well as through a reduction of the monthly rate of interest.

Mortgage Points Can Affect Affordability

On the flip side, not many prospective home buyers are aware that their affordability of a home could be adversely affected by mortgage points that they must pay upfront. People normally look for the best home they can afford. When a homemaker has barely enough funds to enable him to make the down payment on his dream home, having to make an additional upfront mortgage payment could prove to be the last straw. 

In order to qualify for every possible deduction, please follow IRS rules closely. Make sure you don’t miss out on any legitimate deduction.

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