Sometimes, in order to get a mortgage for a home, you may have to pay fees or other costs, known as mortgage points. In general, points are a type of interest that you’ve prepaid, and they may be deductible at tax time should you opt to itemize. If you qualify to deduct all of your mortgage interest, you’ll likely be eligible to deduct mortgage points, too. However, if your home equity debt is greater than $100,000 or home acquisition debt is over $1 million, neither interest nor points are deductible.
Points are deducted within the year that they were paid, as long as:
- The loan is secured by your primary home
- Paying in points is an ordinary practice in your area
- Your points payment was less than or equal to the average charged for your area
- You report payment and deduct points during the same tax year
- Points were not used for inspections, property taxes, legal fees, or titles
- The funds to pay the points weren’t borrowed from a lender, and money paid at closing is the amount charged in points
- You purchase or build a main home with your mortgage
- Points are a percentage of your principal
- The points are listed correctly and clearly on your statements
Mortgages taken for purposes of improving your main home are generally eligible to have the full amount of points deducted during that tax year as long as they meet the first six conditions above. It’s possible to deduct points over a series of years if all the rules aren’t immediately met.
If you’ve refinanced your loan, you’re only able to deduct points that were paid during the life of the new mortgage, unless the first six requirements above are met. In that case, points should be fully deductible for the tax year. Paying in points for certain services, like notary fees, etc. aren’t considered interest payments and are not able to be deducted.
Home sellers who pay interest in points aren’t able to deduct them, although they do lower the capital gain amount from the sale, allowing the buyer to subtract the new gain amount from the home’s cost basis. Second home interest points are only deductible for the term of the loan.
Don’t forget: Itemized deductions, including points, are subject to a 2% AGI limit.