Can You Deduct Mortgage Points On Your Taxes?

Mortgage points are prepaid interest paid to a lender during a home purchase or refinancing. They are expressed as a percentage of the principal loan amount; one point equals one percent of the loan. For instance, on a $200,000 mortgage, one point would cost $2,000. Paying points generally allows borrowers to secure a lower interest rate, potentially reducing monthly payments and offering long-term savings. The Internal Revenue Service (IRS) recognizes points as a form of home mortgage interest, which can sometimes be tax-deductible.

Meeting the Deductibility Requirements

For mortgage points to be deductible, several conditions must be met. The loan must primarily be used for the purchase or substantial improvement of your main home. The points must be specifically for a mortgage.

The payment of points must align with established business practices in the loan’s origination area, not exceeding customary charges. Points must be paid directly to the lender. If a seller pays points on your behalf, the IRS treats these as if you paid them directly. All points must be clearly itemized on the settlement statement, such as a Closing Disclosure or Form HUD-1.

How to Deduct Points

There are two primary methods for deducting mortgage points: fully in the year of payment or amortized over the loan’s life. To fully deduct points in the year paid, the loan must be secured by your main home and used for its purchase or construction. The points must also reflect an established business practice in your area, and their amount should not exceed the customary charges.

You must use the cash method of accounting. Points should not be paid in place of other charges, such as appraisal fees or property taxes. The funds you provided at or before closing, including any seller-paid points, must be at least equal to the points charged, and these funds cannot have been borrowed from the lender. If these conditions are satisfied, you can deduct the points in full in the year paid.

If the points do not meet all the criteria for full deduction in the year of payment, or if you choose not to deduct them immediately, they must be amortized over the life of the loan. This means you deduct an equal portion of the points each year. For example, on a $300,000 mortgage with 3 points ($9,000) and a 30-year term, you would deduct $25 per month, or $300 annually. This method applies to loans not secured by your main home, or if the loan is for purposes other than buying or building your main residence.

Common Scenarios for Points Deduction

When refinancing a mortgage, points paid are generally not fully deductible in the year they are paid. Instead, these points typically must be amortized over the new loan’s life. However, if a portion of the refinanced amount is used for substantial home improvements to your main home, the points attributable to that improvement may be fully deductible in the year paid, provided other conditions are met.

Points on home equity loans or lines of credit are generally not deductible unless the loan proceeds are used to buy, build, or substantially improve your main home. Even then, such points are typically amortized over the loan’s term. This is a specific limitation for loans incurred after December 15, 2017. If a home seller pays points on behalf of the buyer, the buyer can deduct these points, but must reduce the cost basis of the home by the amount of the seller-paid points.

Points paid for loans used to substantially improve your main home can be fully deductible in the year paid, similar to a purchase mortgage. Points for investment properties or second homes are amortized over the loan’s life.

Documenting Your Deduction

Accurate documentation is essential when claiming a deduction for mortgage points. Your mortgage lender is required to report the amount of points you paid on Form 1098, Mortgage Interest Statement. This amount is typically found in Box 6. Form 1098 also details the mortgage interest you paid during the year, usually in Box 1.

In addition to Form 1098, retain your settlement statement, such as the Closing Disclosure. This document provides a comprehensive breakdown of all closing costs, including the points paid, and clearly shows how they were itemized. When preparing your tax return, deductible mortgage points are reported on Schedule A (Form 1040), Itemized Deductions, under the “Home Mortgage Interest” section.