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Mortgages > Purchase
Can I deduct the points I paid on my mortgage?
SETH SUTEL, AP Business Writer. Associated Press
Copyright Associated Press
Q. I paid some "points" on my mortgage to get a lower interest rate. I know I can deduct the mortgage interest payments, but can I also deduct the points?
A. Yes, but only if certain conditions are met.
The extra payments on mortgages known as "points" can usually be deducted from your taxes in the year you paid them as long as they are disclosed on the closing statement from your home purchase, known as the HUD-1 form, and if they are not substituting for other mortgage costs such as an appraisal.
There are a few other conditions that also must be met. Paying points must be an established business practice in the area you live in and the points you paid cannot be more than what is usually charged there. If it's a mortgage to buy or build a home, you can deduct the points even if you rolled them into the loan balance.
Where it gets a little trickier is if you were one of the many people who refinanced their mortgages last year to take advantage of the lower interest rates or to take money out of home equity in a cash-out refinancing.
You can deduct the points you paid in a refinancing, but you can deduct them all at once only if you paid for the points out of pocket and didn't roll the points into the principal amount, as many borrowers do to lower their closing costs.
Even if you did roll in your points, don't despair: You can still write them off, but over time. What you need to do is bring your HUD- 1 form to your accountant and say you want to write off the points from your refinancing over the life of the loan.
If you do your taxes yourself, divide the amount you paid in points over the term of the loan, and that's how much you can deduct each year. Say you paid one point on a $100,000, 15-year mortgage, or $1,000. Divide 1,000 by 15 and you get $67 a year.
If you did your refinancing, in, say, September, you can deduct only a portion of the points. Divide the yearly deduction by 12 and that's the amount you can deduct per month _ following the above example, that's four months at $5.55, or $22.
In either case, whether you're amortizing the points over the life of the loan or deducting them all at once, they still get combined with the amount of regular mortgage interest payments on your itemizations on Schedule A of your 1040.
Now here's the next trick, which some people miss out on. If you're already deducting points year-by-year under a refinancing and you refinance once again, the points you already paid become deductible immediately.
Bob Doyle, a certified public accountant with the St. Petersberg, Fla.-based firm Spoor Doyle & Associates, says many taxpayers miss out on this deduction.
"Don't forget it _ you don't refinance your mortgage every year," Doyle said.
If you're looking for more information on deducting points and mortgage interest, refer to the IRS publication 936, "Home Mortgage Interest Deduction."
• Apply now for a home loan!
IRS publications: http://www.irs.gov/forms_pubs/index.html
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Dateline: Undated
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