Mortgage Points Paid

[Motorider]

• I'm completing taxes for 2020 and my form 1098 has Points Paid in box 6 for home I purchased in 2020 and paid points up front. Turbo Tax does not ask for box 6 points amount and I do not see where to enter amount to claim this deduction. I am not paying points over life of loan as I paid them at closing. The software is not asking for this but I want to enter it. Thank you.

[Cynthiad66 · Accepted solution]

Please try this.

Points on Loans on New Loans: You will want to enter a separate 1098 to cover these points paid. When prompted, enter 0.00 for Boxes 1, 2, 5, and the Property (real estate) taxes box, and checkbox 7, as you’ve already entered the details on your first 1098. For Box 3, add the date in 2020 when the loan originate

You can deduct points for your main home, if all of the following conditions apply:

• They're discount points (see the definition)
• The mortgage is used to buy, build, or improve the home, and the home is the collateral for the loan
• Paying mortgage points is a customary practice in your area and the points you paid aren't excessive for your neighborhood
• The points were paid directly to the lender, either by you or the seller (no borrowing)
• Your down payment, plus any points the seller paid, exceed the points paid amount
• You use the cash method of accounting (almost all taxpayers do)
• The points are calculated as a percentage of the mortgage principal (not required on home-improvement loans)
• The points are clearly itemized on your settlement statement as points (not required on home-improvement loans)

If you meet all the above criteria, you can either deduct all your points in the year you paid them or deduct them in equal increments over the life of the loan. Either way, you'll need to itemize to get the deduction.

The deduction for mortgage interest is capped at $750,000 of debt. Interest on up to $1 million of acquisition debt for loans prior to December 15, 2017 is grandfathered.

[Motorider]

Thank you Cynthia. Appreciate the immediate help with this! 

[aglambert]

Hello,

I have what I think is a similar problem, but the solution did not work.

I have three 1098s to enter - a rental, my prior primary residence (which I am keeping as a second rental) and the house I purchased 3 December 2020. I paid points on the loan for the new house, but there is no option to enter them in Turbo Tax. When I follow the instructions given before, I get a screen asking me whether I want to spread the points for the loan or have no points to deduct, and no option to enter the amount of the points. My understanding is the points are deductible the year purchased on a new primary residence .

How can I get an option to enter the points paid on my new house? Thank you.

[DaveF1006]

I think the program thinks that your new home is a refinanced loan and not an original loan. Here is how to enter correctly.

1. Assuming you are working on your 1098 on your new home.
2. After you enter the mortgage interest, balance, and loan origination date there is a question that asks Did you pay points in 2020 when you took out the loan? Here you will choose the first option, I paid points when I purchased or refinanced to improve my main home in 2020.
3. The screen asks Tell us about the points you paid. pick the option that pertains to you. then a drop-down will occur asking you what amount your points are.
4. Next question, Was this loan paid off or refinanced with a different lender in 2020? No
5. Answer the next question.
6. The next screen says Is this loan a home equity line of credit or a loan you've ever refinanced? Here you will answer that this is an original loan you used to buy or build your house. 
7. Next screen will show you what your deduction is, which includes both home and the full amount of the points that you just reported.

[aglambert]

I think I solved my original problem - I think I was entering in a 1098 form  that was copied from last year. When I deleted it and started over, the instructions worked. However, I do have more questions based on the instructions on calculating the deductible amount based on the loan amounts relative to IRS limits.

The loan for our old house was originated before 2017 and was less than the $1M limit for full deductibility on older loans. We did not sell the house and still have the loan.

The loan for our new house was originated 12/3/20 and over the $750k limit for loans originated after 2017.

We moved to the new house on 12/28/20, and did not rent our previous house until 1/15/2021.

I saw a help example ("what if I had a mortgage larger than $750,000 at any time during 2020 with the sale of a home") on selling a home and buying new, but that doesn't  fully fit our situation.

I entered old house loan straight from the 1098 (no calculation of proportion deductible since all should be deductible) and included the earlier origination date and principal amount.

For the new house, I performed the manual calculation for the percentage of the new loan interest paid (payment for December paid at origination) that is permissible as described in help and did not enter the principal amount. Also entered the points paid at origination.

Is that correct?

[DaveF1006]

It depends. I suppose you can make a case for making the interest calculation but errors could arise from that. Just make sure you record the calculation you made in a separate statement that documents the position that you took.  Keep that calculation handy in your tax return folder just in case IRS contacts you regarding the calculation.

It probably would have been more correct to calculate the average loan balances between the two houses but that calculation can be subject to errors also.  For an example, If your loan balance on you old home was $1M on January 1 and you sold your home on April 1. Your loan balance outstanding for that period of time was $ 333K($1M/3). Assuming your new balance is $750K, thus your loan balance for the year was $750K X 9/12=562K.  Add the two combined balance is $562 + 333=$895K. So for the first 1098 you will enter $333 as the principle and the second $562.  Then trust Turbo Tax to correctly calculate the interest limitation taking in consideration that the first loan had the $1M mortgage balance limitation and the new loan has the $750K limitation. To see that calculation, you would have to look at the home mortgage interest worksheet  to see if it calculated correctly.

Hopefully, i gave you some food for thought as there is no consensus on how to report so that the amounts will come out correctly. Just document the calculation and position you took just in case if you may need to defend it in the future. 

[alo2021]

Cynthiad66:  when you say, "If you meet all the above criteria, you can either deduct all your points in the year you paid them or deduct them in equal increments over the life of the loan. Either way, you'll need to itemize to get the deduction."  

Question: Is this my choice? 

Although I can deduct all the points in this year's return (because I purchase the house as my residence, not a refinance operation), I don't want to do so.  I do not have enough itemize deduction this year, i.e. I will use the Standard Deduction method to file my return.  Hence, if I do not spread the points, the whole amount of the points will be lost.  If I choose to spread the points over the life of the loan, I may have a chance to itemize in future years and get some deduction whenever I itemize.  So is it my choice to deduct all the points in one year or spread it over the life of the loan?   Thanks.  

[JohnW152]

@alo2021

Yes, it's your choice, but to deduct the points ratably (equally) over the life of the loan, you have to meet certain requirements.

According to Deduction Allowed Ratably in the IRS’s Publication 936, Home Mortgage Interest Deduction,

1. 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.

2. Your loan is secured by a home. (The home doesn't need to be your main home.)

3. Your loan period isn't more than 30 years.

4. If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period.

5. Either your loan amount is $250,000 or less, or the number of points isn't more than: 

    a. 4, if your loan period is 15 years or less; or

    b. 6, if your loan period is more than 15 years.