Tax Deduction Points

Homeownership is never easy. While it’s the goal of every red-blooded American, those that have taken the plunge certainly know the responsibilities involved. Nothing can be more stressful than dealing with the responsibilities like leaky faucets, winterizing, and faulty electrical repairs. Wait—maybe we misspoke. Perhaps the most dreaded part of owning a home is taxes. 
 Maybe you’ve heard about points when you were discussing your mortgage and remain a bit confused with exactly what they are. We here at TH Tax Services understand that the IRS makes things a bit confusing when trying to determine how you may be eligible for tax breaks regarding your points. In this article, we’ll be taking a broad look at how you can use points to your advantage.
 As always, though we encourage homeowners to know as much as possible to offset their tax burden, there is simply no substitute to Find a Tax Professional for Mortgage Points. At the end, we’ll provide information to give you peace of mind so you can relax and enjoy your home.

What’s the  Point of Points?
 Curious to know what points are? Points (also known as loan origination points) are terms defined by the IRS that are attributed to charges that you’ve paid to obtain a mortgage for your home. Basically, these points work as prepaid interest that may be deductible as mortgage interest if you itemize them on Form 1040, Schedule A. If you qualify for deducting all of the interest on your home’s mortgage, you may be eligible to deduct those points paid on the mortgage.
 There are two criteria that affect your eligibility. These are:

• if your acquisition debt exceeds $1 million, or
• if your home equity debt exceeds $100,000. For these cases, you are not able to deduct all of the interest on your mortgage and subsequently cannot deduct all of your points. To learn the specifics of how the IRS classifies this,  Publication 936 (“Home Mortgage Interest Deduction”) can provide some more information.

Because of the ambiguity involved, it always is in your best interest to Find a Tax Preparer that can guide you throughout the finer points of your specific case.
 Point  Deduction Guidelines
 The IRS has requirements for you to deduct points in full for the year that you pay the points. Unfortunately, you have to meet all of their requirements:

1. Your main home secures your loan (the house in which you live in most of the time is       considered your “main home”). 
2. The points paid were not more than the amount generally       charged in that area. 
3. 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. 
4. The points paid were not for items that are usually       listed separately on the settlement sheet. These include such items as       appraisal fees, inspection fees, title fees, attorney fees, and/or       property taxes. 
5. The funds you provided at or before closing, including       any points the seller paid, were at least as much as the points charged.       You cannot have borrowed the funds from your lender or mortgage broker in       order to pay the points. 
6. You use your loan to buy or build your main home.

And…

7. The points were computed as a percentage of the       principal amount of the mortgage, and 
8. The amount shows clearly as points on your settlement       statement.
9. Paying points is an established business practice in       your area.

That’s quite a list, no? In addition, if you have paid points on a loan for improvements on your main home (refer to the definition above), you may be eligible to deductions in the year paid if you meet the first six criteria listed above. Points that cannot meet these requirements may still be deductible over the lifespan of the loan.
 Refinancing gets a bit more complicated. Generally, you are able to deduct the point only over the course of the new mortgage—not the previous one(s). If you’ve used your refinanced mortgage proceeds to improve your home and also meet the first six criteria, you may deduct the portion of points related to the improvement in the year you paid with your own funds. These remaining points can be deducted over the lifespan of the loan.
 To further complicate matters, the points that are charged for preparation costs for a mortgage note, notary fees, and appraisal fees are not eligible for this deduction. Furthermore, the points paid by the seller of a home are not eligible for deductions as interest on the seller’s return—they are, however, a selling expense that can reduce the overall amount of gains. The buyer, in turn, can deduct those points paid by the seller under the condition that the buyer subtracts the amount from the cost or basis of the residence. Finally, you can only deduct points you have paid on loans secured by your second home over the lifespan of the loan. Of these itemized deductions, some may be subject to limitations based on adjusted gross income (AGI).
 If all of this seems a bit of a blur lost in “legalese,” we sympathize with you. We recommend finding a qualified Accountant service to sort out just exactly what you are eligible for and what is excluded.