Home Mortgage Points

Question:
Are paid home mortgage points deductible on my income tax return?

Answer:
Generally the answer is “yes”… but not always.  It the home-buyer pays “points” to secure a loan that is used to acquire a principal residence or make improvements to a principal residence, then those points are generally deductible.  The loan must be secured by the taxpayer’s principal residence.  “Points” paid to buy a second home, a vacation home or to secure a home-equity line of credit are not deductible.

“Points” are deductible by the home-owner in the year paid.  The payment may be made from an escrow deposit, a down payment or an escrow deposit.  But if the points are paid from the proceeds of the loan, the points are not currently deductible.  In addition, to be deductible, the payment of points must be an established practice in the area where the home is located and not exceed the amounts generally charged as points in the area.

Deductible points may be labeled as “points,” “loan origination fees,” “discount points” or “loan origination fees” on the loan closing statement and must be calculated as a percentage of the loan amount.

Points paid to refinance a home loan are not current deductible, but must be amortized, or spread, over the term of the loan.  If a part of the refinancing is used to make improvements to the home, the points that relate to that portion of the new loan used to improve the home are currently deductible.

A home owner may make an election to amortize the “points” over the term of the loan rather than deduct the points in the year paid if the taxpayer receives no tax benefit in the year in which the points are paid.  That could occur if the taxpayer’s standard deduction is greater in the year in which the points are paid than the taxpayer’s itemized deductions in that year even including the points.  That situation could occur if the taxpayer, a first time homeowner, were to acquire a home near the end of the tax year.

Real Estate Property Tax Deduction

Question: As a home-owner, may I deduct my real estate taxes that I paid on my residence on my 2008 tax return?

Answer:

The deduction of residential real estate tax is a little more complicated for 2008, and 2009, than previously. Although the treatment of residential real estate is substantially the same as before, some taxpayers may fare somewhat better for 2008 and 2009.

Prior to the 2008 tax year, it was necessary for the homeowner to have enough itemized deductions on Schedule A, including the real estate tax, to exceed the standard deduction allowable for the year. (The 2008 standard deduction amounts are $10,900 on a Joint Return or Surviving Spouse Return, $8,000 for a Head of Household filer, and $5,450 on an Unmarried or Married, Filing Separate Return. There are some additions to the above amounts for taxpayers that are age 65 and over or are blind.)

For 2008 and 2009 a home owner that does not have enough itemized deductions to exceed the allowable standard deduction for their filing status may still get some benefit from the payment of residential real estate tax in addition to the full amount of the standard deduction. The homeowner may claim an additional standard deduction of $500 ($1,000 on a joint return). If the actual amount of real estate paid is less than these amounts, then the addition to the standard deduction is limited to the amount of real estate tax actually paid. Remember, as individual taxpayers we are on a cash-basis. That means the tax must be paid during the year in order to be a deduction for tax purposes. If your real property tax is paid by your mortgage company from an escrow account the taxpayer may only deduct the property tax if the mortgage company makes the tax payment by December 31.