When Are New Mortgage Points Tax Deductible?

When Are New Mortgage Points Tax Deductible

Most of us know we can deduct mortgage interest on our taxes each year. But what are the rules when it comes to deducting “points” paid on your new mortgage?

First lets talk about what points are.

Points are charges that are paid by a borrower, you, to get into a mortgage.

Points are considered prepaid interest. Generally speaking, because points are prepaid interest, you must deduct them over the term of the mortgage.

However the IRS says you may be able to deduct the points in the year of the actual payments, as long as you meet the following requirements:

1. The loan is for your primary residence.

2. Paying points is common in your area.

3. You use the cash method of accounting.

4. Points were not used for items like appraisal, inspection, title and attorney fees.

5. You brought the funds at closing and did not borrow the funds from a lender.

6. The points were computed as a percentage of the principal of the mortgage.

If you answer yes to all of these questions, then you can deduct the points paid for the year in which the payment was made.

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