Points are charges incurred by a borrower in order to obtain a mortgage loan, generally expressed as a percentage of the loan amount. They may also be referred to as loan origination fees. For tax purposes, points are treated as prepaid interest, and are generally deductible over the life of the loan, rather than being fully deductible in the year they are paid.
Points Fully Deductible in Year of Payment
Nevertheless, you may be able to deduct the full amount of the points in the year you paid them if you meet a series of tests:
The loan is secured by your main home.
Paying points is an established business practice in your area.
The points were not excessive.
You use the cash method of accounting.
The points were not in place of other amounts that are normally stated separately, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
The amount you paid at or before closing, plus the points paid by the seller, was at least as much or more than enough to cover the points charged to you as the borrower.
You use the loan to buy or build your main home.
The points were calculated as a percentage of the principal amount of the mortgage.
The points are clearly shown on the settlement statement.
Points Not Fully Deductible in Year of Payment
If you do not meet the tests for fully deducting your points in the year they are paid, or if you prefer not to deduct them that year, you can deduct the points ratably over the life of the loan if you meet the following tests:
You use the cash method of accounting.
Your loan is secured by a home (not necessarily your main home).
Your loan period is not more than 30 years.
If the loan period is over 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer periods.
Either your loan amount is $250,000 or less, or the number of points is not more than four for a loan period of 15 years or less, or six for a loan period longer than 15 years.
Other Situations
The following are some additional observations regarding points:
Points paid on a loan secured by your second home are not fully deductible in the year you pay them. They must be amortized and deducted over the life of the loan.
Points you pay on a home improvement loan may be fully deducted in the year you pay them if you meet the first six tests mentioned above.
Points paid to refinance a mortgage are generally not fully deductible in the year you pay them, unless you use the proceeds to improve your home. In this case, the percentage of the proceeds you use to improve your home would be used to determine the portion of the points you can deduct that year. The remaining balance of the points would be deductible over the life of the loan.
If you paid off a mortgage early, deduct any remaining points in the year you paid off the mortgage.