If you’re a homeowner or considering buying a home, you may have heard of mortgage points. These points can help lower your interest rate, but you might be wondering if they’re tax deductible. In this blog post, we’ll explore what mortgage points are and the rules for deducting them on your tax return.
What are Mortgage Points?
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate on your mortgage. One point typically equals 1% of your loan amount. For example, if you’re taking out a $300,000 mortgage, one point would cost you $3,000. By paying points, you can lower your monthly mortgage payments over the life of the loan.
Tax Deductibility of Mortgage Points
The good news is that mortgage points can be tax deductible, but there are certain requirements you must meet. The IRS allows you to deduct mortgage points in the year you pay them if you itemize your deductions and meet the following criteria:
Requirements for Deducting Mortgage Points
– The loan must be for your primary residence
– The points must be paid directly to the lender
– The points must be clearly itemized on your loan settlement statement
– The amount paid for points must be typical for your area
– The points cannot be paid for items usually listed separately on the settlement sheet (e.g., appraisal fees, title fees, etc.)
Special Situations
If you’re refinancing your mortgage, the points you pay are still tax deductible, but you’ll need to deduct them over the life of the loan. For example, if you pay $3,000 in points on a 30-year mortgage refinance, you can deduct $100 per year for 30 years.
Points paid on a home improvement loan may be fully deductible in the year you pay them if the loan is used to substantially improve your main home. However, points paid on loans for second homes or investment properties are deductible over the life of the loan.
How to Claim the Deduction
To claim the mortgage points deduction, you’ll need to itemize your deductions on Schedule A of your tax return. Make sure you have your loan settlement statement handy, as it will show the amount of points you paid.
Consult with a Tax Professional
While mortgage points can provide a valuable tax deduction, it’s essential to consult with a tax professional for personalized advice. Tax laws can change, and there may be specific nuances to your situation that require expert guidance.
Conclusion
Mortgage points can be a smart way to lower your interest rate and monthly mortgage payments. By understanding the requirements for deducting mortgage points on your tax return, you can potentially save money on your taxes. Remember to keep detailed records, consult with a tax professional, and make informed decisions when considering mortgage points.