According to IRS Topic 504: "Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid.
You can deduct the points in full in the year you pay them, if you meet all the following requirements:
- Your main home secures your loan (your main home is the one you live in most of the time).
- Paying points is an established business practice in the area where the loan was made.
- The points paid weren't more than the amount 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.
- The points paid weren't for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
- The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can't have borrowed the funds from your lender or mortgage broker in order to pay the points.
- You use your loan to buy or build your main home.
- The points were computed as a percentage of the principal amount of the mortgage, and
- The amount shows clearly as points on your settlement statement.
You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above.
Points that don't meet these requirements may be deducted ratably over the life of the loan."
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