Deducting Points Not Reported to You on Form 1098

When purchasing a home, you may pay fees to your lender known as mortgage points, which are a form of prepaid interest. Lenders report the mortgage interest you have paid throughout the year on Form 1098, Mortgage Interest Statement. Sometimes, the points you paid at closing are not included on this form. This guide explains how to handle the deduction for eligible points that were paid but not reported on your Form 1098.

Conditions for Deducting Mortgage Points

The loan must be secured by your main home and used to either buy or build this primary residence. The payment of points and the amount paid must be an established business practice in the area where the loan is made.

The points must be computed as a percentage of the loan’s principal amount and be clearly itemized as “points” on your loan documentation. You cannot deduct charges for services, such as appraisal fees or property taxes, as points.

The funds used to pay the points must have been paid directly by you and not borrowed from your lender or mortgage broker. The cash you provided at or before closing, including any down payment, must be at least as much as the points charged. You must also use the cash method of accounting for your taxes.

Locating Proof of Paid Points

You must have documentation to prove you paid any unreported points. The primary document is your settlement statement, which is the paperwork you received at closing that outlines all costs associated with the mortgage. For loans originated after October 3, 2015, this document is called the Closing Disclosure. For loans made before that date, you would look for the HUD-1 Settlement Statement.

On the Closing Disclosure form, you can find the amount you paid for points listed in Section A: Origination Charges. Look for a line item specifically labeled “Points” or a similar term, which will show a corresponding charge. This amount is what you can potentially deduct.

You do not need to send the Closing Disclosure with your tax return, but you must keep it with your tax records for several years after filing. If you cannot locate your settlement statement, you should contact the lender or settlement company that handled your closing to request a copy.

How to Deduct Unreported Points on Your Tax Return

To deduct your mortgage points, you must itemize your deductions using Schedule A (Form 1040), Itemized Deductions. If you choose to take the standard deduction, you cannot deduct your mortgage points.

Your lender will send you Form 1098, which shows the amount of mortgage interest you paid during the year in Box 1, and you report this amount on line 8a of Schedule A. You enter the amount of deductible points not shown on Form 1098 on line 8c. You then add the amounts from lines 8a, 8b, and 8c together and enter the total on line 8d.

Special Circumstances for Points

There are specific situations where the rules for deducting points differ.

Seller-Paid Points

The IRS treats points paid by the home seller as if they were paid directly by the buyer. This means the buyer can deduct these points in the year of purchase. However, the buyer must also adjust the basis of their home by subtracting the amount of the seller-paid points from the purchase price.

Refinancing a Mortgage

Points paid to refinance a mortgage cannot be fully deducted in the year they are paid. Instead, these points must be deducted in equal amounts over the life of the loan. For example, if you paid $3,600 in points on a 30-year (360-month) loan, your deduction is $10 for each mortgage payment made during the year.

An exception to the refinancing rule occurs if you use a portion of the refinanced mortgage proceeds to make substantial improvements to your main home. You can fully deduct the part of the points related to the home improvements in the year you paid them. The remaining portion of the points must still be deducted over the life of the loan. If the loan ends early because you sell the home or refinance with a different lender, you can deduct any remaining points in that final year.