Deducting mortgage points

Owning a home can be a great asset for Americans, and many view it as an investment into their futures. Having a stake in property not only enables consumers to build equity, but it may also qualify them for lucrative tax benefits. While many individuals are aware that they may deduct mortgage interest on their income tax returns, few may know that they might also be eligible to write off mortgage points as well.

Points are prepaid interest and each one is equal to one percent of the loan amount. Lenders typically charge points to increase their earnings, and new owners generally benefit from lower mortgage rates as a result, Bankrate.com explains. Individuals who paid points will see them on the 1098 statement from their lender, which will detail how much interest was paid. Homeowners who can deduct all the interest paid on their mortgage can usually deduct the mortgage points paid on their mortgage. However, those who plan on deducting their points in full during the year in which they are paid must meet nine requirements.

First, the loan must be secured by the individuals' main home, which is typically defined as the property they reside in for most of the year. Second, paying points must be considered an established business practice in their area. Third, the points that were paid should not exceed the amount generally charged in that area. Fourth, homeowners must use the cash method of accounting. This means that individuals must report income in the year they receive it and deduct expenses in the year they paid them. Fifth, the points cannot have been paid for items that are separately stated on a settlement sheet. These items may include fees for appraisals, retaining an attorney, inspections, titles or property taxes.

Sixth, the funds that were provided at or before closing on the home, in addition to the points the seller paid, must be at least equal to the points charged. This means that new owners cannot write off the funds that were borrowed to pay the points. The seventh requirement mandates that owners use the loan to buy or build their main home. The last two rules require that the points were computed as a percentage of the principal mortgage amount and, finally, that the amount is specifically stated as points on an owner's settlement statement.

Keep in mind that these requirements must only be met if owners plan to deduct the full amount of their points in the year they were paid. The IRS has other stipulations for those who refinance, making improvements on their homes or want to deduct their points over the life of their loan. For this reason, it can be helpful for homeowners to consult a tax preparer if they plan to write off points and interest.

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Posted To: Tax Ranger's Blog By: Tax Ranger On: Thursday, August 23, 2012
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