Break out the green eyeshades – Over the next few days we’re going to run a few short refreshers on the various tax rules regarding residential real estate, mortgage interest, and taxes. We know this is dry, dry stuff, but we’ll try to make liberal use of exclamation points (to, you know, keep things exciting!) Today, lets tackle the deductibility of points! (see how that works?)
Deductibility of Points & Closing Costs: Generally speaking, you can deduct points paid for the purchase of a primary residence in the year that you pay them. Points paid for the refinance of a primary residence, or the purchase/refinance of a second home are in most cases only deductible over the term of the loan.
Notable exceptions, tips and a detailed breakdown (with flowchart!) on points and their deductibility after the jump [click the link below]
*Disclaimer: We are not accountants, we are not your accountant. We are not licensed to give tax advice in any way, shape, or form.
The Deductibility "Tests."
You can fully deduct points in the year that you paid them if you meet ALL of the 9 tests on this flowchart [click to enlarge]:
Additional Tips & Easy to Miss items:
1) You may deduct points paid by the seller in the purchase of your home:
"…If all the tests under Deduction allowed in year paid [see chart above], earlier, are met, the buyer can deduct the points [paid by the seller] in the year paid. If any of those tests are not met, the buyer deducts the points over the life of the loan"
2) If you have refinanced, any remaining "undeducted" points from a previous refinance (or purchase) are deductible as a lump sum, ONLY IF you did not refinance with the same lender (same broker is OK.)
"If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan."
Again, please consult a licensed tax preparer, and do not base any tax decisions based solely on the information in this post.
Source:
IRS Publication 936 [An excellent cure for insomnia]
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