Optimal ways of deducting mortgage/refinance point cost?

[julianaq]

I purchased my first house in 2018, with $5800 for points. Then in 2019, I refinanced it (no cash-out) with the same lender (they sold the loan to a different lender for two months before I refinanced back with them), with $3000 for points. And as of this year, I refinanced again to a different lender with no points purchase.

For the year 2018, I didn't use itemized deduction thus didn't make use of that $5800.

For the year 2019, I did itemization thus used the spreading method to deduct 1/30 of $5800+$3000.

For the year 2020/21, I'm planning to follow the above.

However, I read about the acceleration of points deduction when you refinance, so you could deduct the entire points cost after refinance, which makes me wonder if I'm taking the best way of utilizing this $8800 point cost for this year or next year.

Can anyone shed some light on this topic?

[DaveF1006 · Accepted solution]

It depends.  According to this IRS link,  "You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan." The six requirements are:

1. Your main home secures your loan (your main home is the one you live in most of the time).
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid weren't more than the amount generally charged in that area.
4. 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.
5. 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.
6. 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.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage, and
9. The amount shows clearly as points on your settlement statement. 

If this pertains to you and you wish to change the reporting of your points, You will need to amend your 2019 return to claim a bigger portion of your points paid in that year.

[julianaq]

Thanks a lot for your kind help.

When you mentioned amending 2019 return to claim a bigger portion of points, are you referring to both $5800 (from initial purchase at 2018) and $3000 (from 1st refinance at 2019), or simply the $3000?

I think it's clear that I can accelerate the $3000 points deduction next year when I prepare my 2020 return. But I'm unclear about best way to handle that $5800 which I didn't get chance to itemize on the year of paying for it.

[AmyC · Accepted solution]

The $5,800 would be assumed to be spread out over the life of the loan. Even though you didn't claim it in 2018, you would spread it over the years. Better to have some every year than to just lose it.

[julianaq]

Thanks Amy. One last question, what's preventing me from claiming that $5800 in accelerated manner next year? My new refinance basically ended my first mortgage and first refinance loan right? Based on https://www.irs.gov/publications/p936#en_US_2020_publink[phone number removed], I should be able to claim them directly.

[JohnB5677 · Accepted solution]

If you finance with the same lender you cannot take a total deduction for the points.

If your mortgage ends early because you paid it off, AND refinanced it with another lender or sold the home, you can deduct any remaining points for the mortgage in that year.