| A point on a mortgage loan is one percentage | | | | refinancing of a taxpayer's mortgage loan. The |
| point of the loan. For example, two points on a | | | | taxpayer may not deduct the points immediately. |
| $200,000 mortgage loan would be $4,000 | | | | The taxpayer must amortize the points over the |
| ($200,000 x 2%). Points represent prepaid | | | | life of the loan. If the taxpayer pays the loan off |
| interest.A taxpayer who uses the cash method | | | | early, the taxpayer may deduct the unamortized |
| of accounting may deduct points paid on a loan to | | | | points in the year paid.However, for taxpayers |
| buy or improve a principal residence as long as | | | | who live under the jurisdiction of the U. S. Court |
| the points are a normal business practice in the | | | | of Appeals for the Eighth Circuit, if the taxpayer |
| area, are reasonable in amount, and the loan is | | | | pays points on a mortgage loan and uses the |
| secured by the residence (Sections 163(h)(3)(B) | | | | proceeds to pay off a short-term bridge loan, the |
| and 461(g)(2)). Interest, including points, on a loan | | | | taxpayer may deduct the points in the year paid |
| to acquire or improve the taxpayer's residence is | | | | (Huntsman v. Commissioner, 90-2 USTC Para. |
| limited to the interest on the first $1,000,000 of | | | | 50,340, CA-8, 1990, rev'g 91 TC 917). The U. S. |
| the mortgage loan.The limit on deductibility of | | | | Court of Appeals for the Eighth Circuit has |
| interest on a loan to acquire a residence applies to | | | | jurisdiction over taxpayers in the states of |
| the taxpayer's principal residence and one other | | | | Arkansas, Iowa, Minnesota, Missouri, Nebraska, |
| residence (Section 163(h)(4)(A). However, a | | | | North Dakota, and South Dakota.If a taxpayer |
| taxpayer may deduct points paid in the year paid | | | | pays points on a mortgage loan to acquire |
| only in connection with a mortgage loan on the | | | | undeveloped land, a commercial building, or rental |
| taxpayer's primary residence (Section 461(g)(2)). | | | | real estate, the taxpayer must amortize the |
| If a taxpayer pays points on a mortgage loan to | | | | points over the life of the loan. If the taxpayer |
| purchase a second home, the taxpayer must | | | | pays the loan off early, including a sale of the |
| amortize the points over the life of the loan.A | | | | property, the taxpayer may deduct the |
| taxpayer claims the deduction on Schedule A of | | | | unamortized points in the year paid.Taxpayers |
| Form 1040. A buyer may deduct the points even | | | | should remember to deduct points paid in |
| if the seller pays them (Rev. Proc. 94-27, 1994-1 | | | | connection with a mortgage loan to purchase or |
| CB 613). A taxpayer who uses the accrual basis | | | | improve their principal residence, whether the |
| of accounting must amortize the points over the | | | | purchaser or seller pays the points. For points paid |
| life of the loan.If a taxpayer pays points on a | | | | in connection with a refinancing of a mortgage, to |
| home equity loan, the taxpayer may not deduct | | | | obtain a home equity loan, or to obtain a |
| the points immediately unless the taxpayer uses | | | | mortgage loan on rental or commercial property, |
| the proceeds of the home equity loan to improve | | | | taxpayers should remember to deduct the points |
| the property. If the taxpayer does not use the | | | | over the life of the loan and deduct the |
| proceeds of a home equity loan to improve the | | | | unamortized points in the year the taxpayer pays |
| property, the taxpayer must amortize the points | | | | the loan.Alan D. Campbell is a CPA in Arkansas |
| over the life of the loan (Sections 163(h)(3)(C) | | | | and Florida and is self-employed primarily as an |
| and 461(g)(1)).The deduction of interest, including | | | | author of tax publications. He earned a Ph.D. in |
| points, on a home equity loan is limited to the | | | | accounting with an emphasis in taxation from the |
| interest on a home equity loan up to $100,000 | | | | University of North Texas. He is also admitted to |
| unless the taxpayer uses the home equity loan | | | | practice before the United States Tax Court. He |
| for business purposes. If the taxpayer pays the | | | | has published numerous articles on tax topics in |
| loan off early, the taxpayer may deduct the | | | | professional journals. He is the co-author of the |
| unamortized points in the year paid (Temp. Regs. | | | | book Tax Strategies for the Self-Employed and |
| Sec. 1.163-10T(j)(3)).The same rule that applies to | | | | the revision editor of CCH Financial and Estate |
| a home equity loan also generally applies to a | | | | Planning Guide, 15th edition. |