Deduction of Points on Personal Home Mortgage Lender

By | January 30, 2014

Deducting Points from Mortgage Lender on Personal Home

First, home owners are eligible to take the home mortgage interest deduction. Another one of the many benefits of home ownership and taxes is that if you may have paid “points” to your mortgage lender, you may be entitled a special tax deduction for these points that you have paid. A current tax deduction for points in the year in which they are paid may be a significant benefit and the following article explains how to make the most of the deductibility of points on the purchase of a personal residence.


Deduction of Points on Personal Home Mortgage Lender

The general tax law is that the costs of borrowing money, which also includes money paid as points, cannot be deducted in the year they are paid. Instead, these amounts can only be deducted over the life of the loan to which the costs relate.


How Purchasers can Deduct Points

However, for purchasers of a personal residence,there is a “safe harbor,” under which you can choose to deduct points in the year they are paid if all of the following tax deduction requirements are satisfied:

  • The taxpayer must be on the cash method of accounting for tax purposes. This is automatically true for most homeowners.
  • Mortgage points must be paid in connection with the acquisition of your principal residence.
  • The mortgage loan with points that are being deducted must be secured by that residence.
  • You must have paid the points directly from funds that you did not borrow, or else the seller must have paid the points on your behalf. No deduction for mortgage points is available if the amount of the points was withheld from the loan proceeds by the lender.
  • There must be a comparison to the local business practices and how points are paid, they must be reasonable
  • The points must be clearly designated as such on statement in connection with the closing.
  • Points must be computed as a percentage of the stated principal amount of the mortgage.


Deducting Mortgage Points

Remember, that you choose to claim the points either as a current deduction or over the life of the loan. For most taxpayers, the current deduction is preferable, but there could be certain tax situations where it is better to deduct the mortgage points over the life of the loan. Most likely, this will be the case when you cannot take an itemized deduction in the current year, but plan on being able to take an itemized deduction in future years.