If you pay points when acquiring a new home, you may be able to get some tax help by deducting them on your federal income tax return. Mortgage points can help lower your tax burden if you itemize your deductions on IRS Tax Form 1040 (U.S. Individual Income Tax Return), Schedule A.
Mortgage points are charges associated with obtaining a mortgage loan. Since points function as a form of prepaid interest, they may be deductible similar to mortgage interest, and can provide help by lowering your taxable income.
Here are the criteria for deducting your mortgage points:
- The loan must have been used to build or buy your main home.
- You must use your main home (where you live in the majority of the time) to secure your loan.
- You must live in an area where paying mortgage points is an established business practice, and you must not be paying points that are much higher than what your neighbors are/were charged.
- You must report your income in the year you receive it and deduct your expenses in the year you pay them.
- You must have provided funds to pay for the points charged by your lender; your mortgage lender or broker cannot have lent you the funds to pay for your points.
- The points must have been calculated as a percentage on the principal amount of the mortgage loan, clearly shown as “points” on your settlement statement.
- You cannot deduct mortgage points for additional fees ― such as appraisal fees, title fees, property taxes, attorney fees, inspection fees, or any tax help that you received from an accountant (or other tax professional) who helped you calculate your points.
Mortgage points should be deducted for tax help on your statement in the year that you paid them. However, mortgage points on a second home are deductible over the lifetime of the loan, not just the first year you paid them.
In addition, you might be able to receive even more tax help by deducting points you paid to refinance an existing mortgage. These points are usually deducted over the life of your refinanced loan. If you use part of the refinanced mortgage to make improvements to your main home, you may be able to deduct the points related to the home improvements in the year that you paid them ― thus receiving the maximum amount tax help on your return.
If you pay mortgage points as part of a transaction when you are the seller, you cannot deduct the points from your tax return. However, you can still receive tax help by using the points as a selling expense to reduce the amount of capital gains that you are taxed on. The buyer can deduct the mortgage points on his/her tax return, however, after subtracting them from the cost of the residence.