Are mortgage points deducted or amortized?

Mortgage Points: Deduction or Amortization

Treatment of Mortgage Points for Tax Purposes

Mortgage points, also known as loan discount or discount points, are costs that are essentially a form of prepaid interest on a mortgage loan. The way mortgage points are treated for tax purposes can vary depending on the specifics of the loan and whether the points are deductible or need to be amortized.

Deductibility of Mortgage Points

• Generally, points paid to obtain a new mortgage, refinance an existing mortgage, or for loans secured by a second home can be deducted over the term of the loan.
• The IRS allows you to deduct the full amount of your points in the year you pay them if certain conditions are met. These conditions include the loan being secured by your main home and the points being calculated as a percentage of the principal amount of the mortgage.
• If you cannot deduct the full amount in the year paid, you may be able to deduct the points ratably over the life of the loan.

Amortization of Mortgage Points

• If the points do not meet the criteria for immediate deduction, they may need to be amortized over the term of the loan.
• Amortization involves spreading out the points paid over the life of the mortgage and deducting a portion of the points each year.

Exceptions and Special Situations

• There are certain situations where points cannot be deducted as interest. For example, points paid for services like appraisal fees, inspection fees, title fees, attorney fees, and property taxes are not deductible as mortgage interest.
• If the seller pays the points on behalf of the buyer, the buyer may be able to deduct these points, but the seller cannot.

Documentation and Reporting

• To claim a deduction for mortgage points, you must have proper documentation, such as the settlement statement showing the points paid.
• Deductions for mortgage points are typically reported on Schedule A (Form 1040) as itemized deductions.

References

For more detailed information on the deductibility and amortization of mortgage points, taxpayers can refer to IRS Publication 936, Home Mortgage Interest Deduction, and IRS Topic No. 504, Home Mortgage Points.

Conclusion

The treatment of mortgage points for tax purposes depends on whether they qualify for deduction or need to be amortized. Taxpayers should carefully review the IRS guidelines and ensure they have the necessary documentation to support their tax treatment of mortgage points.