Are Mortgage Refinance Points Tax Deductible?
In an effort to encourage homeownership, the IRS allows a taxpayer to deduct certain mortgage fees and interest paid for the mortgage. The IRS rules allows deduction of mortgage points in much of the same way it allows deduction of mortgage interest. To qualify for the deduction you must file a schedule A and itemize the deductions on your 1040 return.
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IRS Point Definition
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Mortgage loans require several different types of settlement fees. Some of these fees are points while others are not. Items such as an appraisal fee, credit report fees, title report fees and filing fees are not deductible as points. Origination and discount costs typically are charged as a percentage of the loan. One point is equal to 1 percent of your loan amount. If your loan is $250,000, then one point equals $2,500. The IRS defines mortgage points as prepaid interest. The origination and discount costs required to obtain your loan are tax deductible as prepaid interest.
Purchase
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Usually all of the points required to purchase a home are deductible the year you purchase the home. You actually have to pay the costs, and cannot have the seller or the mortgage company pay the costs on your behalf. Because you used the loan to purchase the home, and if you qualify under the other requirements, you can immediately write off all of the points immediately.
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Refinance
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The IRS also allows borrowers to write off points from a refinance. Normally, points paid for a refinance must be deducted throughout the term of the loan. If your new loan is for 30 years, then you must deduct the points over 30 years. If part or all your refinance is used for improvements on the home, that portion of the new loan's closing costs are deductible the same year as the loan. For example, if you borrowed $200,000, paid off $150,000 of debt and used the remaining $50,000 to improve your home, 25 percent of the points would be immediately deductible since 50,000 is 25 percent of 200,000. The remaining 75 percent of the points must be deducted over the term of the loan.
Qualification
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The IRS requires you meet the following specific guidelines to deduct mortgage points in the same year they are paid. The loan must be for your primary residence. The points paid must be customary and not more than the generally charged number of points in your area. Your taxes must be filed on a calendar-year cycle. The points must not pay for other items not considered points. You must use the loan to buy or build your main home. The settlement statement must clearly show you paid points as a percentage of your loan amount.
You may be subject to other limitations depending on your mortgage balance and gross adjusted income. Seek the advice of a CPA or tax preparer before claiming any deduction on your taxes.
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