NEW YORK (MainStreet) — Points (charges equivalent to 1% of a mortgage loan) you pay to refinance of your principal residence or to purchase or refinance a vacation home or investment property must be “amortized” over the life of the mortgage: Points on a traditional 30-year mortgage, for example, are deducted over 360 months.
But if you refinance a mortgage on your principal residence in order to get additional money to substantially improve the residence, you can deduct in full the points paid on the funds you used for the improvements.
If you pay off a mortgage on which you have been amortizing points - you sell the property or refinance the mortgage with a new lender - you can deduct the amount of “unamortized” points on that mortgage in full in the year of the pay-off.
Say you paid $3,600 in points on a 30-year mortgage to purchase a vacation home. You have deducted a total of $540 in points on prior years’ tax returns. Then you sell the home. That means this year you can deduct $3,060 in points on Schedule A ($3,600 minus the $540 you have previously deducted).
This doesn’t work if you refinance the mortgage with the same lender, though. Say you purchased the vacation home with a mortgage from Chase; you then refinance the mortgage with Chase to get a lower interest rate and to reduce the term to 15 years. There are no points on the refinance. Because you refinanced with the same lender, the remaining $3,060 in unamortized points must continue to be amortized over the 180 month term of the new loan.
However you may have refinanced, check your points to make sure you get the deductions you deserve.
For all the latest tax tips as you prepare your 2010 returns, check out MainStreet's Tax Center, updated daily!