ARE MORTGAGE POINT TAX DEDUCTIBLE?
Loan origination fees and discount points are other names of mortgage point. The answer to the question is, yes! Mortgage points are tax deductible if specific conditions are fulfilled. In a year in which it is paid, the whole amount of mortgage points cannot be deducted. This discount must be deducted from the total time period of loan equally and it is considered as a prepaid interest.
There are certain exceptions to this line.
Deduction of the full amount of mortgage points:
All the mortgage point can be deducted if the conditions described below are met.
- First is, the amount of loan is secured by the home of a person.
- The business practice of paying points must prevail in an area where payment of the loan is made.
- Point charged generally in the area must be equal to the points paid.
- Another condition is that cash accounting method is used. Through this method transaction like receiving revenues and payment of expenses are made in the year in which these occurred. This method is used by many individuals.
- The amounts that are stated in the settlement statement such as appraisal fee, title fee, inspection fee, attorney fee, and the property taxes and are not for payment of points.
- The loan is used for the building of the main
- The mortgage points are calculated as a percentage of principal amount of mortgage.
- The year in which the mortgage is taken out, the mortgage points are fully tax deductible.
Mortgage points that are not fully deductible in the paid year:
All the mortgage points are not fully tax deductible. Some mortgage points are tax deductible in proportions or in parts during the whole life of the loan.
Points paid on refinance loans and home or investment properties are paid in the form of parts. For writing off these points, certain conditions must be met.
- The cash method of accounting must be used.
- The home must secure the home loan.
- The time period of the loan must not be longer than 30 years.
- The time period of loan does not matter. Whether the time period is long or short, terms of the loan must remain same as other loans offered in an area.
The portion of points that is related to the improvement made during the year is deducted fully in case of refinance loan. The remaining portion of points is deducted during the lifetime of the loan. The amount that is deducted is equal to the amount provided and remaining amount is spread over the life of the loan.
Points deduction in case of refinancing or selling:
In the case of refinancing, selling, prepayment, and foreclosure, the remaining amount is deducted in the year in which the mortgage ended. In a year, when the loan is taken out and the deductions are not itemized then mortgage points are spread over the life of the loan.
For the deduction of mortgage point, all requirements must be met.