The deduction for mortgage points could lower your federal tax obligation. When you pay in advance for points, also known as loan origination points or discount points, the lender will lower your interest rate when you purchase a home. As part of your closing costs, your points may also be tax deductible because mortgage interest is.
You might be able to deduct all of your points in the year you pay them if you claim itemized deductions on Schedule A of IRS Form 1040. Fortunately, whether you or the homeseller paid the points is irrelevant to the IRS. Either way, those points are your deduction, not the sellers’. Tip: Tax law treats mortgage points for a home purchase differently than mortgage points for a refinance. Points on a refinance loan are subtracted over the course of your loan. So, if you paid $1,000 in points for a refinance over ten years, you can deduct $100 annually on Schedule A.
The Fine Print for the Mortgage Points Deduction
Simple but detailed IRS regulations govern mortgage points deductions for home purchases. To deduct the points in the year you pay them, you must pass each of these seven requirements.
1. Your primary residence must be the object of your mortgage, which must be used to purchase or construct it. The place you live most of the time is your primary residence. Your primary residence can be a house, a trailer, or a boat as long as it has a kitchen, a bathroom, and space for sleeping.
You must subtract the points you paid for a second home over the course of your loan.
2. Paying points must be an accepted form of payment in your community. And the amount can’t exceed the percentage normally charged. You cannot pay 10 points and then subtract them if the majority of people in your area only pay one or two points.
3. Your points have to be legitimate. Your lender cannot declare other items such as property taxes, title fees, attorney fees, appraisal fees, inspection fees, or inspection fees as “points” and subtract them from your loan.
4. You must pay the points directly. In other words, you couldn’t have gotten a loan from your lender to pay them. Any points paid by the seller will be regarded as your direct payment.
Additionally, as long as the sums you pay, such as a down payment or earnest money deposit, are equal to or greater than the points, they are regarded as funds that you have personally paid.
Say you put $10,000 down and pay $1,000 in points. Your points are covered because the downpayment exceeds the points, so if you itemize deductions, you can write them off. If you put no money down but paid one point instead, the $1,000 wouldn’t be deductible as a mortgage point.
5. You must calculate your points as a percentage of your mortgage. One point costs 1% of your mortgage balance, or $1,000, for a mortgage of $100,000.
6. The points must appear as “points” on your settlement disclosure statement. They might be described as discount points or loan origination points in the listing
If you pass tests one through five above, you can also fully deduct the points you pay (for the year paid) on a loan to upgrade your primary residence.
Where to Deduct Points
Having determined that your points are deductible, here is how to do so:
Your lender will send you a Form 1098. Look in Box 2 to find the points paid for your loan.
Look on the settlement disclosure you received at closing if you don’t receive a Form 1098. Depending on who paid the points, the points will appear on that form in the sections outlining your costs or the sellers’ costs.
Report your points on Schedule A of IRS Form 1040.
There are Two Things Related to Points You Can’t Deduct:
1. Interest buy-downs your builder paid
As a buyer incentive, some builders deposit funds in escrow accounts, which the lender draws from each month to help you pay your mortgage. Even though the money is used to pay interest and is prepaid, those aren’t considered points. The funds that the builder placed in that escrow account are not deductible.
2. Interest payments from government programs
You can’t deduct points paid by a federal, state, or local program, such as the federal Hardest Hit Fund, to help you if you’re experiencing financial trouble.
How do I claim mortgage points on my taxes?
Mortgage points are deductible as an itemized expense on Schedule A of Form 1040. The specifics are as follows: Typically, your lender will send you Form 1098, which details how much you spent on points and interest for your mortgage during the year. Transfer this sum to line 8a of Schedule A of Form 1040.
Are mortgage points on a refinance tax deductible?
When you pay off the loan if you refinance with a new lender, you can deduct the remaining mortgage points. However, you must subtract the remaining points over the course of the new loan if you refinance with the same lender. You might be able to deduct the points you’ve already paid.
Can I deduct PMI on my taxes 2022?
The deduction for private mortgage insurance (PMI) won’t be carried over to the tax year 2022, so I can’t claim it on my 2022 return.
What mortgage items are tax deductible?
Usually, only payments for mortgage interest, buying points, or property taxes qualify as tax deductions for closing costs. Other closing costs are not. These include: Abstract fees.