What are mortgage points, and can I deduct them?
In real estate, a point is an amount equal to 1% of the mortgage. A point on a $120,000 mortgage is worth $1,200, two points are worth $2,400 and so on. There are two types of points:
Discount points lower your mortgage rate by a certain percentage. When you buy discount points, you're paying interest up front in exchange for a lower interest rate on your mortgage. Because discount points are prepaid interest, they're deductible as mortgage interest on a main home or second property that's not being rented out.
Origination points are charged by lenders to cover loan processing costs. Sometimes they'll also include fees for appraisals, inspections, title, attorneys, notaries, and real estate taxes. Origination points aren't deductible on non-rental property.
On rental property, discount and origination points are amortized (spread out) as a depreciation expense over the life of the loan.
Caution: Your lender may use alternative terminology for points, including mortgage points, loan points, loan origination fees, maximum loan charges, and loan discounts, just to name a few. To further confuse the situation, they may even use misleading terminology, for example, "loan origination points" to describe what are actually discount points. If you don't know which category your points belong to, ask your lender for clarification.
Can I deduct mortgage points?
Yes, you can deduct points for your main home, if all of the following conditions apply:
They're discount points
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. Moreover, the deduction of mortgage interest is increased when $1 million of acquisition debt is taken out prior to December 15, 2017.
Are points deductible on a second home and refinances?
On a second home, points can only be deducted over the life of the loan. The same is true for refinances, except in cases where you used a portion of your refinance proceeds to improve your home. In that case, the points related to the home-improvement portion of the loan can be deducted in the year you paid them.
If you refinanced with the same lender, any undeducted points left over from the first mortgage will be deducted over the life of your new loan. But if you refinanced with a new lender, any leftover undeducted points can be deducted in the year of the refinance.
When you get to the Did you have any home loans? screen in the Deductions & Credits section, we'll walk you step by step through your mortgage, including points and refinances.
Are points deductible on a rental property?
On rental property, yes. Points are deductible as an amortizable expense over the life of the loan.
