"Is Pre-Payment Penalty Tax deductible"

Often mortgage lenders charge a penalty for the early payoff of a home loan. Usually, the penalty is only for an early payoff in the first few years of the loan. The penalty is considered an interest charge and is deductible in the same manner as your mortgage interest. For example, if it's a home loan the penalty would be deductible on Schedule A as home mortgage interest. If the loan is for a rental property, then the interest would be deducted on Schedule E.

Similarly, points that had been deducted over the life of the loan would be deductible in the year that the underlying mortgage is paid off, with one exception: In a refinance, points paid must be deducted over the life of the new loan, while points paid on the purchase of a principal home can be deducted upfront.

Example; in a refinance situation, if the new loan term is for 15 years and you paid $1,500 in points, you would claim an annual deduction of $100 for the points paid (or $100 per year). If you refinance, sell or pay off your loan early, you can deduct the remainder of the points in that same year. The only exception to the deduction would be if you refinance with the existing lender. In this case you would have to continue to amortize the remaining points over the life of the new loan, together with any points paid on the new loan refinance.

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