Received CP28A. How much can I claim from mortgage points on my closing statement when I received cash to borrower at the end of closing?

[Remingtonix]

I received a CP28A that stated I claimed too large of a "Home Mortgage Interest Deduction on Schedule A of your 2024 Form 1040 tax return". After additional review, the error is mistakenly added both the interest from the Form 1098 and the points paid from the closing statement to line 8A instead of separating them with points claimed on line 8C. I need help figuring out how much of the points I can claim, see below for details:

My closing statement section A reflects borrower paid points of 5.391% of the mortgage amount (as percentage of loan amount) of $15,981.61 and seller paid of $9,425.90, totals $25,407.51.

Amount of cash I contributed to closing that is listed in section L was $5,000 earnest deposit and $19,000 wire transfer, totaling $24,000. Realtor credit of $3,799.40 is listed as an adjustment. Seller credit under paid on behalf of borrower at closing was $10,861.15. Total due from borrower at closing (section K) is $505,614.99 and total already paid by or on behalf of borrower at closing (section L) is $510,565.67, and resulted in cash to close to borrower of $4,950.68.

Am I able to claim the full $24,000 of money I directly contributed to closing towards the mortgage point interest deduction, or the full $25,407.51 of mortgage points paid given the realtor credit was an adjustment in section L? Does the amount of cash to close to borrower at the end have any impact on deductible amount?

[KrisD15]

You can claim all of the points paid at closing, (in your case $25,407.51) regardless of the fact that some was paid by the Seller directly or that some was paid by the Seller as an adjustment to commission paid the real estate Agent. You must meet the other requirements (main home, loan balance limits) regarding the Home Mortgage Deduction for the total to be deductible. 

According to the IRS:

"amounts the seller pays for points on your loan is treated as paid directly by you from unborrowed funds, provided you subtract the amount of the seller-paid points from your basis (purchase price) in your home." 

(The basis, or "your cost", of the home may be necessary to determine Capital gain when the property is sold. If this is the case, you would subtract the amount the Seller paid from your costs to determine an adjusted basis/cost.)

You are correct that points paid at closing and not on Form 1098 need to be entered on line 8c, but the amount is not limited by the portion paid by the Seller. Use your closing statement to report the points paid at closing not reported on Form 1098. 

CP28A Notice is usually alerting to an error that home mortgage interest claimed exceeds the limit because of the amount of your home mortgage loan balance for the year. If you held two mortgages in the same year, or your single mortgage put you over the limit (750,000 or 375,000 if filing Married Filing Separately) you'll also need to ensure that the balance of your loan(s) did not effect the amount of interest that you can claim and is the reason for the IRS notice. 

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