Purchased a house in 2022 and started renting out a room 2 months later. Can I deduct a prorated amount of my mortgage points paid instead of amortizing?

[aharken]

Hi all, I have a quick question regarding my primary residence and deducting points paid on my mortgage

I purchased my primary residence earlier this year and converted 1 of 3 bedrooms (<10% of my home) into a rental. I entered all of my information into the Turbo Tax Home and Business software and was able to have it correctly calculate the deduction for mortgage interest but it doesn't seem to automatically give me the mortgage point deduction.

My question is, am I able to take this deduction (say 90% of the points paid if I rent out 10% of my residence) or does the IRS not allow it? If it is possible, will I need to manually calculate and enter the values into TurboTax or is there a screen that I will need to locate? Thank you.

[PatriciaV]

No, home mortgage points for your primary residence are itemized deductions for Schedule A and cannot be allocated to rental activities.
See: IRS Tax Topic 504 - Home Mortgage Points

However, if the mortgage was secured by a rental property, points would be amortized over the life of the loan.

[aharken]

Thank you so much for the response!

A few quick follow up questions:

1. On the Turbo Tax product, would I enter 0 for points on Schedule E and then all of the points on a separate entry on my Schedule A?

2. As far as the mortgage interest deduction, would I manually calculate the portion of mortgage interest that applies to the room I rented for the period of time it was occupied? So if it were 10% of my house and it was occupied for 50% of the time I owned the house last year, would I allocate 5% of the total interest?

[GeorgeM777]

Following up on the post from @TurboTaxVal, 

1. No.  If you are using the straight-line method to amortize the points over the life of the loan, this is reported on Schedule E.
2. Yes.  Allocate that portion of the mortgage interest that relates to the rental portion of your home.  For example, if the mortgage interest was $1,000, ten percent of the $1000 is allocated to your rental--$100.  However, because the property was rented for only half the year, in this example, the mortgage interest deduction would be $50.  

@aharken

[aharken]

Thanks for the reply!

Last follow up for the reply:

1. Am I able to take the full deduction this year instead of using the straight-line method? I would prefer the full deduction for this year.

2. Ok perfect, that makes sense. Really appreciate the help!

[GeorgeM777]

No, while that may be your preferred option from a tax perspective, the rental portion of the points need to be amortized over the life of the loan (not the recovery period of the rental which is 27.5 years).

The most recent version of IRS Publication 527 states the following with regard to points:

Because points are prepaid interest, you generally can’t deduct the full amount in the year paid, but must deduct the interest over the term of the loan.

Below is a link to IRS Publication 527.

IRS Publication 527

@aharken

[aharken]

So I would be able to deduct the full personal portion and amortize the rental portion over the life of the loan? So for example, I rent out 10% of my house. I can deduct 90% of the points on my Schedule A and 10% of them would need to amortized on the Schedule E over the life of the loan?

I’m reading Chapter 5 of the 529 publication and it states I have to divide expenses between personal and rental use. Just making sure I’m understanding it correctly. Thank you so much for the help!

[GeorgeM777]

Yes, that's correct.   Depending on whether your points qualify as de minimis, you may have some options regarding the method to use when amortizing the points over the life of the loan.  

@aharken