Friday, December 5, 2008


Q. My HUD statement only says "Loan Origination Fee - % - bank name amount". It does not say "points" anywhere, but it was computed as 1.25 points of the loan. So, does it qualify for a full deduction or an amortized one?

A. Your question is kind if like – “My car is blue. How many miles to the gallon should it get?” You do not provide sufficient information to give an answer.

For me to properly answer your question you must tell me if the mortgage is for the purchase of your principal residence or for a vacation or rental property. If it is a refinanced mortgage is it on your personal residence and is any additional monies taken out used to substantially improve the residence?

First off, the word “points” will rarely if ever appear on the Settlement Statement for the purchase or refinance of real estate. This item is most often referred to as “Loan Origination Fee” or “Loan Discount” or “Commitment Fee” and is reported on Lines 801 or 802 of the statement. This number will be a % (1%, 1.25%, 2.5%, 3%, etc) of the “Principal amount of new loan” indicated on Line 202.

In order to deduct in full the total amount of the “Loan Origination Fee” indicated on your Settlement Statement the mortgage on which the points are charged must be used to buy, build or substantially improve your principal residence, and be secured by that residence.

In addition, in order to deduct the points in full in the year of purchase the amount of money paid at closing, including any seller-paid points and the initial down payment or deposit, must at least equal the amount of points charged. The points on a $300,000 mortgage are $6,000. You had initially given a $1,000 deposit and paid $25,000 at closing. The $6,000 is deductible in full on your Schedule A.

While the points paid in such situations qualify for a full deduction, you can also elect to amortize the points over the life of the mortgage. Why would you want to do this? Consider the following example.
John and Jane Q Taxpayer close on the purchase of a principal residence in November of 2007. The total amount of points paid at closing is $2,500 and the interest paid on the mortgage for 2007 is also $2,500. The real estate tax adjustment on the Closing Statement is $458. This is the first principal residence for both of them – prior to the purchase J+J had rented an apartment. Their deductible state and local income taxes and charitable contributions add up to $4,142. Their itemized deductions for 2007 total $9,600. The 2007 standard deduction for a married couple for is $10,700. So they are not able to itemize on their 2007 Form 1040. They can elect to amortize the points paid on the purchase over the life of the mortgage loan so they will be able to get a tax benefit for the points in future years.

Points paid on the refinance of your principal residence or the initial purchase or refinance of a vacation home or a rental or investment property must be amortized over the life of the mortgage. However, if you refinance a mortgage on your principal residence in order to get additional money to “substantially improve” that residence you can deduct in full the points paid on the funds used for the improvements. A substantial improvement is one that adds value to the home or prolongs its useful life.


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