Tax Tips: Pay Points for a Deduction

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A "point" in the mortgage world is a percentage point charged to obtain a home loan. One point on a $100,000 mortgage would be $1,000.  Points (aka Loan Origination Fees, Loan Discounts, Discount Points, etc.) are usually reported on Lines 801-802 on the back of the standard HUD Settlement Statement.

Points paid to borrow money are deductible as interest on Schedule A. Generally, points are amortized over the life of the loan. Points on a typical 30-year mortgage are deducted over 360 months. If the points paid on a 20-year mortgage are $3,000 you can deduct $12.50 per month ($150 for the year).

You can, however, deduct the total amount of the points paid on a loan used to buy, build or substantially improve your principal residence, and secured by that residence, in full in the year paid.

To deduct the points in full in the year of purchase, the amount of money paid at closing must at least equal the amount of points charged. The points on a $300,000 mortgage are $6,000. You had initially given a $1,000 deposit and paid $25,000 at closing. The $6,000 is fully deductible.

If the seller pays all or part of the points to help the buyer obtain the mortgage, or as an additional incentive to buy, the seller-paid amount is considered to have been paid by the buyer.

The mortgage lender should report the points paid on the purchase of a principal residence on Form 1098.

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

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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