Are Points on a Mortgage Tax Deductible?

Understanding the deductibility of mortgage points can provide significant tax benefits for homeowners. These benefits are available if certain Internal Revenue Service (IRS) requirements are met.

What Are Mortgage Points?

Mortgage points are essentially prepaid interest paid to a lender at closing. These upfront fees are typically expressed as a percentage of the total loan amount. For instance, one point equals one percent of the mortgage loan, so on a $300,000 loan, one point would be $3,000.

There are generally two types of points: “discount points” and “loan origination fees.” Discount points are paid to the lender to “buy down” or reduce the interest rate on the mortgage, potentially lowering monthly payments. Loan origination fees are charged by the lender for processing the loan. Both types are considered points as they represent charges for the use of money.

Key Conditions for Deductibility

Points paid on a mortgage can be fully deductible in the year they are paid if certain conditions are met. The loan must be secured by your main home, which is the residence you ordinarily live in most of the time. The loan’s purpose must be to buy, build, or substantially improve your main home.

The payment of points must be an established business practice in the area where the loan was made, and the amount of points paid should not exceed the amount generally charged in that area. It is also required that the points are computed as a percentage of the principal loan amount. The funds used to pay the points must come directly from the borrower, not from the loan proceeds.

Points must be clearly shown on the settlement statement (e.g., Closing Disclosure) as “points,” “loan origination fees,” or “discount points.” Charges for services like appraisal or title fees are not considered deductible points, even if labeled as such. The cash method of accounting is required for deducting points in the year paid.

Special Situations for Point Deductions

When points are paid on a refinanced mortgage, they generally cannot be fully deducted in the year they are paid. Instead, these points must be amortized, meaning they are deducted equally over the entire life of the new loan. An exception applies if a portion of the refinanced mortgage proceeds is used for substantial home improvements on your main home; the points related to that improvement may be deductible in the year paid. If you refinance with a new lender and had unamortized points from a previous mortgage, the remaining balance of those points may be fully deductible in the year the old loan is paid off.

Points paid by the seller on a buyer’s main home mortgage are deductible by the buyer. The IRS treats these seller-paid points as if the buyer paid them directly. However, the buyer must reduce their home’s tax basis (purchase price) by the amount of the seller-paid points.

Points on home equity loans and lines of credit (HELOCs) are deductible only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. If the proceeds are used for other purposes, the interest and points are not deductible. For second homes or rental properties, points are not deductible in the year paid. Instead, these points must be amortized and deducted over the life of the loan.

How to Report Your Deduction

Homeowners find information about mortgage points paid on Form 1098, Box 6. Your lender sends this form to you and the IRS, detailing mortgage interest and points paid. If you paid more deductible points than reported on Form 1098, you can report the additional amount.

To claim the deduction for points, homeowners must itemize deductions on Schedule A (Form 1040). The amount from Form 1098, Box 6, is entered on Line 8a of Schedule A, for home mortgage interest. If points were not included on Form 1098 or if you are deducting amortized points, report these on Line 8c of Schedule A. Keeping accurate records, such as your closing disclosure and Form 1098, is important for substantiating deductions. For complex situations, consult a tax professional.