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HOMEOWNER TAX TIPS FOR YOUR BEST RETURN: DEDUCTING MORTGAGE POINTS

by Frank Taglienti
Deducting Mortgage Points

Third in a four-part series of tax tips for homeowners

If you itemize your deductions and can take the mortgage interest deduction on your federal income tax, you may be able to deduct the points you paid on your home mortgage, too.

Points are prepaid interest, so they get reported as home mortgage interest on Form 1040, Schedule A .

The total deductible points you paid during the year (along with the interest your paid) show up on the Form 1098 your lender sends to you.

The median tax deduction for home mortgage interest points was $509 in 2011, according to most recent IRS data.

You can typically deduct points in full in the year they're paid, if your meet all these requirements:

  1. The mortgage was for your primary home.
  2. Paying points is an established business practice in your area.
  3. The points you paid were typical for your area.
  4. You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).
  5. The points you paid didn't cover services or products that show up on your loan settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees or property taxes.
  6. The points you paid at or before closing, plus the points the seller paid, were at least as much as the points charged. You didn't borrow money from your lender or mortgage broker to pay the points.
  7. You used your loan to buy or build your primary home.
  8. The points were computed as a percentage of the principal amount of your mortgage
  9. The amount is clearly shown as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan you used to improve your main home--if you met #1 through #6 above.

If you refinance and you use part of your loan to improve your main home, and you meet requirements #1 through #6, you can fully deduct the part of the points related to the improvement in the year you paid them.

If You Don't Meet The Requirements

If you don't meet the IRS' requirements (and this typically happens in a refinance) you may still be able to deduct your points over the life of your new mortgage rather than in a single year.

You can deduct the rest of the points over the life of the loan if you meet these requirements:

  • You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).
  • Your loan is secured by a home. The home does not need to be your main home.
  • Your loan is for not more than 30 years.
  • 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.
  • Either your loan amount is $250,000 or less, or the number of points is not more than:
  • 4 points, if your loan period is 15 years or less.
  • 6 points, if your loan period is more than 15 years.

Other Pointers On Points

If you're a seller and you paid points for a buyer, you don't get to deduct those as interest on your tax return. But, you can count them as a selling expense, which can reduce your capital gain.

When a seller pays points for you as a buyer, you have to subtract the amount of those points when you calculate your basis or cost of the residence. You'll likely do that capital gains calculation when you sell the home many years from now, so be sure to file your settlement sheet where you can find it in the future.

Points you pay on a second home loans can generally be deducted only over the life of the loan.

When you're deducting points and your mortgage ends you can generally deduct any remaining balance in the year your mortgage ended. But, if you refinance with the same lender, you have to deduct the remaining balance over the life of your new loan. Mortgages end when you prepay, refinance, lose your home to foreclosure, or experience a similar event.

You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 Instructions.

If the mortgage you got to acquire your home was for more than $1 million or your home equity debt exceeds $100,000, you probably can't deduct all your mortgage interest or all your points. Read Publication 936,  Home Mortgage Interest Deduction, to figure out how to deduct your points.

Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.

 

Deducting Mortgage Points

Third in a four-part series of tax tips for homeowners

If you itemize your deductions and can take the mortgage interest deduction on your federal income tax, you may be able to deduct the points you paid on your home mortgage, too.

Points are prepaid interest, so they get reported as home mortgage interest on Form 1040, Schedule A .

The total deductible points you paid during the year (along with the interest your paid) show up on the Form 1098 your lender sends to you.

The median tax deduction for home mortgage interest points was $509 in 2011, according to most recent IRS data.

You can typically deduct points in full in the year they're paid, if your meet all these requirements:

  1. The mortgage was for your primary home.
  2. Paying points is an established business practice in your area.
  3. The points you paid were typical for your area.
  4. You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).
  5. The points you paid didn't cover services or products that show up on your loan settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees or property taxes.
  6. The points you paid at or before closing, plus the points the seller paid, were at least as much as the points charged. You didn't borrow money from your lender or mortgage broker to pay the points.
  7. You used your loan to buy or build your primary home.
  8. The points were computed as a percentage of the principal amount of your mortgage
  9. The amount is clearly shown as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan you used to improve your main home--if you met #1 through #6 above.

If you refinance and you use part of your loan to improve your main home, and you meet requirements #1 through #6, you can fully deduct the part of the points related to the improvement in the year you paid them.

If You Don't Meet The Requirements

If you don't meet the IRS' requirements (and this typically happens in a refinance) you may still be able to deduct your points over the life of your new mortgage rather than in a single year.

You can deduct the rest of the points over the life of the loan if you meet these requirements:

  • You use the cash method of accounting (you report income in the year you receive it and deduct expenses in the year you pay them).
  • Your loan is secured by a home. The home does not need to be your main home.
  • Your loan is for not more than 30 years.
  • 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.
  • Either your loan amount is $250,000 or less, or the number of points is not more than:
  • 4 points, if your loan period is 15 years or less.
  • 6 points, if your loan period is more than 15 years.

Other Pointers On Points

If you're a seller and you paid points for a buyer, you don't get to deduct those as interest on your tax return. But, you can count them as a selling expense, which can reduce your capital gain.

When a seller pays points for you as a buyer, you have to subtract the amount of those points when you calculate your basis or cost of the residence. You'll likely do that capital gains calculation when you sell the home many years from now, so be sure to file your settlement sheet where you can find it in the future.

Points you pay on a second home loans can generally be deducted only over the life of the loan.

When you're deducting points and your mortgage ends you can generally deduct any remaining balance in the year your mortgage ended. But, if you refinance with the same lender, you have to deduct the remaining balance over the life of your new loan. Mortgages end when you prepay, refinance, lose your home to foreclosure, or experience a similar event.

You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 Instructions.

If the mortgage you got to acquire your home was for more than $1 million or your home equity debt exceeds $100,000, you probably can't deduct all your mortgage interest or all your points. Read Publication 936,  Home Mortgage Interest Deduction, to figure out how to deduct your points.

Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.

 
 
Deducting Mortgage Insurance

Second in a four-part series of tax tips for homeowners

If you put down less than 20 percent when you bought your home, your lender likely asked you to get mortgage insurance. Those mortgage insurance premiums may be deductible on your federal income taxes if you itemize and you also meet other requirements.

The mortgage insurance deduction is there for you to use on your 2013 taxes, but you may not get it next year. It expired at the end of 2013 and won't be available in 2014 unless Congress renews it.

 
How does your tax refund stack up? Are you getting more or less than average taxpayer? For early filers, the average federal refund totaled $3,211, an increase of $190 from 2013. Get advice about the tax credits available for this filing season and answers to your other tax questions from the IRS' Interactive Tax Assistant.  Once you file, you can use Where's My Refund? to track the progress of your refund.

Mortgage Insurance Deduction Rules

To use the mortgage insurance deduction, you have to clear some hurdles:
  1. You can only deduct mortgage insurance premiums for a mortgage you got on or after Jan. 1, 2007.
  2. If you refinanced in 2007 or later, you can deduct the mortgage insurance premiums for the portion of your loan equal to your original loan.
Look in Box 4 of the Form 1098 your mortgage lender sends you to find out how much you paid for mortgage insurance premiums for 2013.

Income Limits

Even if your loan meets those qualifications, to take the deduction, you still have to meet income requirements based on your adjusted gross income. Your AGI appears on Form 1040, line 38. 

In general, the deduction gets reduced if your adjusted gross income is more than $100,000 ($50,000 married filing separately) and you lose it completely when you adjusted gross income goes above $109,000 ($54,500 married filing separately).
Use the IRS' itemized deductions work sheet (line 13) to see if your adjusted gross income will limit your mortgage insurance deduction.

Deducting Upfront Mortgage Insurance Premiums

If you paid a big mortgage insurance premium at settlement, called an upfront fee, your deduction may work differently than the deduction for monthly payments (but you still have to follow all the rules mentioned above).

"Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is commonly known as a funding fee and guarantee fee respectively," the IRS says. "These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013."

If you paid in advance for any other mortgage insurance, you have to allocate those fees over the shorter of:
  • The mortgage term (usually 15 or 30 years)
  • 84 months (seven years)
If you pay off the loan, your deduction ends -- you cannot deduct the remaining amount.

Here's an example the IRS uses to explain the upfront mortgage insurance deduction:
Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May.

Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 

Ryan's adjusted gross income (AGI) for 2012 is $76,000. Ryan can deduct $880 ($9,240 ? 84 x 8 months) for qualified mortgage insurance premiums in 2012. 

For 2013, Ryan can deduct $1,320 ($9,240 ? 84 x 12 months) if his AGI is $100,000 or less. 

In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.
 

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Photo of Frank Taglienti Real Estate
Frank Taglienti
Berkshire Hathaway PenFed REALTORS®
565 Benfield Road, Suite 100
Severna Park MD 21146
410-440-0824

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