I took out a construction loan to build a house in 2015. My HUD-1 Settlement Statement looks as follows:
Line 801. Origination Charge $3525.70
Line 802. Points $9430.00
Line 803. Adjusted Origination charge $12955.70
However, on the 1098 the lender sent me it only has the $9430 reported in Box 2. The origination charge does not include any non-deductible items such as appraisal fees, etc. My first question is, do I deduct the $12,955.70 even though the 1098 doesn't reflect that number?
IRS pub 530 says to report home mortgage interest not reflected on the 1098 on line 12 of Schedule A. The online software does not allow me to separate the $3525.70 and the $9430. How do I enter this info into the software so it is reported on both Line 11 and Line 12?
Thanks
If you paid Points/Loan Origination that qualifies, you can deduct
them even if they aren't reported on you 1098. Pay close attention to item number eight below.
According the IRS
"You can fully deduct points in the year paid if you meet all the following tests.
Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
Paying points is an established business practice in the area where the loan was made.
The points paid were not more than the points generally charged in that area.
You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided are not required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
You use your loan to buy or build your main home.
The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's."
If you paid Points/Loan Origination that qualifies, you can deduct
them even if they aren't reported on you 1098. Pay close attention to item number eight below.
According the IRS
"You can fully deduct points in the year paid if you meet all the following tests.
Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)
Paying points is an established business practice in the area where the loan was made.
The points paid were not more than the points generally charged in that area.
You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided are not required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
You use your loan to buy or build your main home.
The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's."
Thanks for the fast response. A quick calculation tells me that the $3525.70 is exactly .75% of the loan amount so I'm going to deduct the entire amount shown on the HUD statement. Thanks again.
The correct answer is $9430, assuming all other conditions are met. That's why that's the number in box 2 of the 1098 says $9430, not $12955.70. Just because there's another charge on the settlement statement that's calculated as a % of the loan doesn't make it deductible! It has to be prepaid interest.
Ok, let's put this another way. The lender is *required* to report any points paid in box 2 of Form 1098, to the extent that the points paid conform to certain specifications in the tax code. They can't arbitrarily leave amounts out. If you're going to report something other than what's in box 2 of that Form 1098, then you should really contact the lender and have them issue you a corrected 1098. My guess is they won't do it, because it's most likely correct as is; they generally understand the relevant tax code.
Points and origination charges are not the same thing. If they were, they'd be on the same line of the HUD-1. Points are prepaid interest (which gets you a lower interest rate for the life of the loan), reported to you on line 802 of the HUD-1 and also in box 2 of the 1098. An origination charge is a fee you pay to the lender for the service of creating/providing the loan, reported on line 801 of the HUD-1 and not included anywhere on the 1098.
Points are deductible because they're essentially equivalent to mortgage interest. Origination charges are not; that would be like deducting the appraisal fee or inspection fee.
Now, if your lender made a mistake and didn't include the points on line 802 or on the 1098, that's a different story. In your case, it's very clear that that's not what's going on. The points (2% of the loan) are deductible, the origination fee (0.75% of the loan) is not.
According to IRS Publication 936: Home Mortgage Interest Deduction:
"The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points."
Same Publication:
"Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are: ... Preparation costs for the mortgage note or deed of trust." That's what an origination charge is. Just because the lender may call them "points" doesn't meant that they're prepaid interest. What's deductible is *interest* and *prepaid interest*, not "points" per se.
All of the other charges were itemized out on the HUD and were separate from the origination charge.
Right - the origination fee is it's own charge. It's essentially the lender's "commission" for originating the loan. It's not prepaid interest, it's not deductible.
There isn't anything in the tax code that says that points are deductible. What's deductible is interest. Since interest is sometimes paid up front, in the form of points, the IRS allows a deduction for that up-front interest. Just because other charges are also sometimes calculated as "points" (meaning calculated as a % of the loan) doesn't make them deductible. If the lender says, "My fee for originating the loan is 1% of the loan balance", that doesn't make it deductible. If the lender says, "If you pay 1% of the loan balance up front, then the interest rate for the remaining loan term drops by 0.25%", then that's prepaid interest, and it's deductible. This is why there are separate lines for these items in the HUD-1, lines 801 and 802. Line 803 is then the sum of those 2, which is the total paid to and retained by the lender when the loan is created (originated), aside from escrow amounts which are stated separately.
Publication 936 says:
"Amounts charged by the lender for specific services connected to the loan are not interest. ... You cannot deduct these amounts as points either in the year paid or over the life of the mortgage."
Those 9 tests listed in a previous answer have to do with deducting the points *in full in the year paid*. That's already assuming the points represent prepaid interest. That is, those 9 tests don't determine whether or not the points *are* prepaid interest.
I'm glad you were able to regurgitate what the IRS pub says. What I need to know is where to input points that were NOT reported on Form 1098 so that they show up on Line 8c of the 2019 Schedule A.
The 1098 form I am looking at for Box 2 is marked "Outstanding Loan Principal". Box 6 is listed as "Points Paid on Purchase of Principal Residence". Isn't that the correct box in this discussion, not Box 2 that you are citing?
Yes, if they are reported on the 1098, points will be listed in box 6 on the 1098.
By the way, this thread is from last year, so might not be current for 2019.
Yes indeed, I realize that date and I checked the 1098 forn as it existed last year befor I posted my original question. I still think it was box 6 that should have been cited in the reply, but I'm not a CPA.
The points should be listed in box 6 on form 1098. However, often they are not listed on the form, but you can deduct them even if not listed on the form 1098.
Yes, that's what I think....but what I was originally questioning is why box *2* kept coming up in the original discussion. Thanks. (and that was from a CPU reply)