Can I deduct mortgage points as a tax deduction? Yes, but it depends
April 15, 2015 - Extra
Can I deduct mortgage points as a tax deduction? Are points deductible on your taxes? If you paid points to reduce your mortgage rate, then in certain cases, you can write off those points in the year you purchased your house.
“Points” can be purchased to lower your mortgage’s interest rate. For every “point” (also known as loan origination) you take on equals 1% of your overall loan amount. As long as the points paid are not for a broker’s commission, they are tax deductible in the year that the points were paid.
According to the IRS, paying down your rate with “points” is basically pre-paying mortgage interest — and we know that mortgage interest can be written off.
Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF).
As with everything regarding taxes, it depends on a variety of factors and must meet some requirements. Your ability to deduct leans on whether you are itemizing your taxes, the amount of your debt determines whether you can do it in the year you purchased your home or over time. There are way too many factors and possibilities for a non-professional like me to speak to.
In order to deduct mortgage points on your taxes, you’ll need your closing statement or settlement statement in addition to the proper IRS form that allows you to itemize mortagage points. That form is Form 1098, which is usually provided to you in January by the bank or lender that is servicing your mortgage loan. Here’s how to fill out the 1098:
Report the amount of money paid for mortgage points on Schedule A, Line 11. Note that the IRS requires you to have paid the points in full, without borrowing any money for the purpose. You can only deduct points for the year in which they were paid. In addition, the points must be calculated as a percentage of the mortgage principal amount. If the points were not reported on Form 1098, you must enter the amount on Line 12 and supply the name, address and Social Security number of the person, or the Employer Identification Number of the business, to whom you paid the points. If the seller paid the points, you may also deduct them–but in the future you must also subtract the amount paid by the seller from the cost basis of the home when calculating the capital gain. (From SFGate.com)