"Points" are considered prepaid, home mortgage interest by the Internal Revenue Service. In the loan industry, they are also referred to as discount points, origination fees, maximum loan charges or loan discount. They are usually fully tax deductible in the case of a home purchase, construction of a home, or home improvement.

This article addresses the tax deductibility of points associated with a home purchase. For complete information about home mortgage interest, go to www.irs.gov, or contact your tax advisor.

In order to deduct home mortgage interest, these three conditions must apply to you:

1. You file Form 1040 and itemize your deductions on Schedule A.
2. You are legally obligated to repay the loan. If you make mortgage payments for a friend, and you're not legally required to make the payments, you can't deduct the interest.
3. The mortgage must be secured on your main or second home.

Generally, you must deduct points over the life of the loan. I.e., for a 30-year loan, you may deduct 1/30 of the points each year. In the event you still have a loan balance when you sell your home, you may deduct the balance of the points not previously deducted. If your mortgage ends, and the full amount of the points have not been deducted, you may deduct the balance of the points when the mortgage ends. If you refinance your loan with the same lender, you can't deduct the balance of the points in that year. Instead, you must deduct them over the life of the new loan.

For the tax year in which you purchased your home, you may deduct the full amount of the points you paid for a home purchase if all these conditions apply to you:

1. Your loan is a lien upon (secured by) the home you live in most of the time (main home).
2. Paying points is the norm for the area in which your loan was made.
3. The amount of points paid were not excessive for the area in which you obtained your loan.
4. You use the cash method of accounting (most people do).
5. The points were not paid in lieu of other fees, such as appraisal, title, attorney, etc.
6. The purpose of your loan was to buy the home you live in most of the time.
7. The points were based upon a percentage of the loan amount. For example, 1% loan fee.
8. The amount and type of charge is explicitly stated as points in your closing documents (Uniform Settlement Statement, Form HUD-1). Points are deductible on your tax return if the Seller pays them.
9. The total amount of money you paid to close the loan (not borrowed from the lender), including your down payment, title, escrow, closing agent fees, etc., must be at least as much as the points charged. These funds, however, do not have to have been applied to paying points.

[ The information in this article is intended for general information purposes only. This information is not tax advice, nor should any actions or decisions be based upon any information contained herein. For tax advice, consult your tax advisor.]