Tax Tips: Still More Points on Points

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We discussed the deduction for points paid to buy, build or substantially improve your principal residence. Now let’s look at points paid in other situations.

Points paid to refinance your principal residence, or to purchase or refinance a vacation home, must be amortized over the life of the mortgage.

If you refinance the mortgage on your principal residence to get additional money to “substantially improve” the residence, you can deduct in full the points paid on the portion of the additional principal used for the improvements. A substantial improvement is one that adds value to the home or prolongs its useful life.

If you pay off a mortgage on which you have been amortizing points - you sell the property, refinance the mortgage with a new lender or simply pay off the mortgage with a windfall - you can deduct the amount of “unamortized” points (points not previously deducted) on that mortgage in full in the year the mortgage is paid off.

Here's an example of what we mean: You paid $3,600 in points on a 30-year mortgage for a vacation home. You deducted $540 in points on prior years’ tax returns through 2008. You sell the home in January 2009. You can deduct $3,060 in points on your 2009 Schedule A ($3,600 - $540 = $3,060).

Previously “unamortized” points cannot be deducted in full if you refinance the mortgage with the same lender. You must amortize the remaining points from the old mortgage, plus any points from the new loan, over the life of the new mortgage.

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