Can You Deduct Mortgage Points on Your Taxes?

Mortgage points represent a common financial tool in home financing, allowing borrowers to adjust the upfront costs and long-term interest rates of their home loans. These fees, paid at the time of closing, can influence the overall expense of a mortgage. Understanding how these points function and their potential tax implications is a relevant consideration for many homeowners. The deductibility of mortgage points depends on specific Internal Revenue Service (IRS) guidelines and the nature of the loan.

Understanding Mortgage Points

Mortgage points are fees paid to a lender, typically at closing, and are expressed as a percentage of the loan amount. One point equals one percent of the total mortgage. For instance, on a $300,000 loan, one point would cost $3,000. These points act as a form of prepaid interest, influencing the loan’s overall cost.

There are two primary types of mortgage points: discount points and origination points. Discount points are paid specifically to reduce the interest rate on the mortgage, leading to lower monthly payments over the loan’s life. This practice is often referred to as “buying down the rate.” Origination points are fees charged by the lender to cover the administrative costs of processing and underwriting the loan, and they do not directly lower the interest rate.

General Rules for Deducting Points

Mortgage points may be deductible as home mortgage interest if certain conditions are met under IRS rules. The loan must be secured by your main home, which is the residence you ordinarily live in for most of the time. The payment of points must also be an established business practice in the area where the loan was originated.

The points themselves must be calculated as a percentage of the principal loan amount, and their total amount must not be excessive compared to what is charged in the area. The loan proceeds must be used to purchase or construct your main home. Additionally, the points must have been actually paid by the borrower from their own funds, rather than being withheld from the loan proceeds. It is also a requirement that the points are clearly itemized on the closing documents, such as a Closing Disclosure. These deductions apply to taxpayers who use the cash method of accounting.

Deducting Points in Different Scenarios

The deductibility of mortgage points varies depending on the specific loan scenario.

Points for Home Purchase

For points paid when purchasing a home, they can be fully deducted in the year they are paid if the general conditions are met. The amount of points should also be clearly stated on closing documents and not be for other separate fees like appraisal or title insurance.

Points for Refinancing

Points paid for refinancing a mortgage cannot be fully deducted in the year they are paid. Instead, these points must be amortized, meaning they are deducted incrementally over the entire life of the loan. For example, if $3,000 in points are paid on a 30-year refinanced mortgage, approximately $100 per year would be deductible. If the refinanced loan is paid off early, any remaining unamortized points may be deductible in the year the loan is satisfied. An exception exists if part of the refinanced loan proceeds is used for substantial home improvements, in which case the portion of points attributable to the improvement can be deducted in the year paid.

Seller-Paid Points

When a seller pays points on behalf of the buyer, these points are treated as if the buyer paid them for tax deduction purposes. The buyer can deduct these points if the other deductibility rules are met. However, if the seller pays points, the buyer must reduce the cost basis of their home by the amount of the seller-paid points.

Points for Home Equity Loans

For home equity loans or lines of credit (HELOCs), points are not deductible unless the loan proceeds are used to buy or substantially improve the home.

Required Documentation for Deduction

To claim a deduction for mortgage points, taxpayers need to gather specific documentation that verifies the payment and eligibility. The primary document is Form 1098, the Mortgage Interest Statement, which lenders send to borrowers. This form reports the amount of mortgage interest paid during the year, and Box 6 specifically indicates the amount of points paid on the purchase of a principal residence.

Another important document is the Closing Disclosure, or for older loans, the HUD-1 Settlement Statement. These documents provide a detailed breakdown of all charges and credits associated with the loan closing. Taxpayers should review these statements to identify line items related to “loan origination fees,” “discount points,” or similar descriptions that confirm points were paid. Retaining these records is important to substantiate the deduction in case of an inquiry from tax authorities.

Reporting the Deduction on Your Tax Return

Claiming the deduction for mortgage points involves reporting the eligible amount on your federal income tax return. This deduction is claimed on Schedule A (Form 1040), Itemized Deductions. For taxpayers to benefit from this deduction, they must choose to itemize their deductions rather than taking the standard deduction.

If points were paid for a home purchase and meet the criteria for full deductibility in the year paid, the amount from Box 6 of Form 1098 is entered on the appropriate line of Schedule A. For amortized points, such as those from a refinanced mortgage, a portion is deducted each year over the loan’s term. If the mortgage is paid off early or refinanced with a different lender, any remaining unamortized points from the original loan can be deducted in the year of payoff or new refinancing.