Are Points Paid On A Mortgage Loan Tax Deductible? |

Are Points Paid On A Mortgage Loan Tax Deductible?

Points paid on a mortgage loan are tax deductible. Sometimes the full amount can be deducted in the year of the transaction, and other times the deduction must be spread out over the life of the loan.

Let’s assume you paid 1 point of $3,000

(1 percent of loan amount) on a $300,000

30-year mortgage. If the transaction is a purchase of your primary residence, then the $3,000 can be deducted in one lump sum the year of the purchase.

If the transaction is a refinance of your home, the $3,000 can be deducted in one lump sum only under two specific criteria, which resulted from a recent court case

(Hurley 2005-125):

1. If the refinance creates a lower home payment and the savings or cash out is used for improvements to the property such as a new roof, carpet, or other repairs. (The borrower must provide documented proof of the improvements with their tax return.)

2. If the refinance transaction is being done to purchase an additional property. (Paperwork verifying the purchase will need to be provided.)

If these criteria cannot be met, then the $3,000 deduction is spread out over the 30-year term. The deductible amount would be 1/30th each year, or $100 per year.

Assuming a tax bracket of 33 percent, the tax savings would be $33 per year if spread out for 30 years, and it would be $990 if deducted in one year.

Since the court case is recent and tax laws are so complex, it is necessary that you consult with your tax professional regarding your specific situation to see if your refinance meets the new criteria.

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