Tax Tips: More Points on Points

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Yesterday I told you that you could deduct the total amount of points paid on a loan used to buy, build or substantially improve your principal residence.

But you don't have to deduct the points paid on the purchase of a principal residence in full in the year paid. You can elect to amortize the points over the life of the mortgage. Why would you want to do this? Consider the following example:

John and Jane Q Taxpayer purchase a principal residence in November 2009. The total amount of points paid at closing is $2,500 and the interest paid on the mortgage for 2009 is also $2,500. The real estate tax adjustment on the closing statement is $458. The new residence is the only real estate that they own. Their deductible state and local income taxes and charitable contributions add up to $4,142.

Their itemized deductions for 2009 total $9,600. The 2009 standard deduction for a married couple is $11,400. So they are not able to itemize for 2009. They can elect to amortize the points paid on the purchase over the life of the mortgage loan so they will be able to get a tax benefit for the points in future years.

New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.

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