Interest rates for obtaining a home mortgage are still close to historically low levels. You have probably heard radio or television advertisements advising people to refinance their home mortgage if their existing interest rate is above a certain amount.
Whether you are looking to obtain a home mortgage for the first time or you are refinancing your existing mortgage, having a home mortgage can help to reduce your state and federal income tax.
It may be commonly known that interest paid on a home mortgage may be deductible on your income tax return. However, many do not know that another expense related to home mortgages known as points are also deductible.
If you do not know what points are and how you can deduct them, read on to learn more about this subject.
What are points associated with a home mortgage?
Points are prepaid interest paid by the borrower to the lender. The prepaid interest allows the lender to realize a greater return on the loan in the early years of the mortgage. In addition, the prepaid interest allows the borrower to reduce the monthly loan payment and pay less money to the lender in total if the loan is kept long enough.
The value of a point is based on one percent of the total loan amount. Depending on the borrower’s financial situation, it may be necessary for the borrower to pay points in order to qualify for the loan.
When am I allowed to deduct points on my income taxes?
You can deduct the entire amount of points you pay on a loan in the year you make the payment when all of the following are true:
- The loan relates to the home you live in for most of the tax year.
- The payment of points is common in the area where you are obtaining the home loan.
- The amount charged for payment of the points was not inflated above the normal charge for points paid in the area.
- You use the cash method of accounting related to income and expenses, which means you recognize income and expenses in the year they occur.
- The points do not include other expenses related to the mortgage, such as fees for appraisal, attorney, inspection, property, tax, or title.
- The monies used to pay the points along with any other closing fees were not borrowed from the lender.
- The loan is used to buy or build the home you live in for most of the tax year.
- The points are based on a percent of the total amount of the mortgage.
- The HUD-1 or settlement statement identifies the amount paid as points.
In addition, to deduct points you must elect to use itemized deductions on your tax return rather than the standard deduction.
If the amount you pay for points does not meet all of the above requirements, you may be able to deduct the points over the life of the loan.
Can I deduct expenses labeled as points other than pre-paid interest?
No, only points paid related to interest are deductible for tax purposes. Points paid for other expenses such as preparation fees, appraisal fees, and notary fees.
Who can help me with deductions related to my home mortgage and other income tax questions?
A tax attorney is often the best person to work with to get answers for your tax questions and helping preparing your state or federal income tax return. Only a tax attorney had the training and experience to answer questions about tax law as well as the confidentiality provided by the rules of attorney-client privilege.
If you are ready to speak with a tax attorney to get help with your tax, please call the phone number at the top of this web site or complete the following form.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.