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"Are Points Tax Deductible?"
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Article: "Are Points Tax
Deductible?"
By Andre Plessis
"Are Points Tax Deductible?"
What are Points?
When most people purchase a home, they usually get a mortgage. Mortgages have costs and one of those costs is the "loan origination fee." The loan origination fee is usually a percentage of the loan amount, generally expressed as "points." This loan origination fee is charged by a lender for processing a loan, usually expressed as a percentage of the loan (or points), which pays for the work in evaluating and processing the loan.
For example, one "point" on a $200,000 loan would be $2,000.
Deducting Points when Buying a Home
When buying a home, points are deductible in the year they are paid, providing they meet certain conditions. The main conditions are that the mortgage is secured by the home you live in most of the time and that you used this mortgage to purchase your property.
Are Refinance Points Tax Deductible?
In most refinancing cases, a borrower must
deduct any paid points over the life of the loan. If you refinance to get some
cash out or take out a home equity loan or line of credit and then use the money
for something such as paying college tuition or buying an automobile, you can
still deduct the points, but over the term of the loan. You may deduct
home equity debt interest, as an itemized deduction, if you are legally liable
to pay the interest, pay the interest in the tax year, secure the debt with your
home, and do not exceed certain limitations.
To find out the annual deduction amount, divide the total points paid by
the number of payments to be made over the life of the loan. For example, a
borrower who paid $3,000 in points (loan origination fee) on a 30-year second
mortgage (360 monthly payments) could deduct $8.33 per month, over 30-years. You
need to divide the points by the number of payments over the term of the loan
and deduct points for a year according to the number of payments made in the
year. If the loan ends prematurely, due to payoff or refinance with a different
lender, for example, then the remaining points are deducted in that year.
Is interest on a home equity line of credit deductible as a
second mortgage?
You may deduct home equity debt interest, as an itemized deduction, if you
are legally liable to pay the interest, pay the interest in the tax year, secure
the debt with your home, and do not exceed certain limitations.
Deducting Points on Second Homes
Points paid to finance the purchase of a second home must be deducted over the
life of the loan, not in the year in which they are paid.
Deducting Seller Paid Points
When purchasing a home, sometimes the buyer negotiates for the seller to pay the
closing costs, including the points. If the seller pays the buyer’s points, the
Internal Revenue Service allows the buyer to deduct this as an expense on their
federal tax returns. However, the seller cannot deduct them, too.
To Your Success,
Andre Plessis
Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional
whose primary goal is to provide the expertise, guidance and skills necessary to
obtain the best mortgage to meet your personal needs".
View Client Testimonials
P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 24 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.
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