Dear Ali: I bought a condo this year and now I’m taking a look at my taxes. (I rough them out every year in December to decide how large a retirement contribution to make; I’m a little obsessive.) Are points that I paid when I bought tax-deductible?
A: Yes, they are tax-deductible — if they’re real.
A “point,” for those who don’t know, is one one-hundredth of a mortgage amount. If you’re taking a $500,000 mortgage, one “point” is $5,000.
But those of us in the industry make a further distinction, between “discount points” and “origination points.” A “discount point” is a payment you make to the lender to lower your interest rate; as such, it’s prepaid interest on your home, and that interest is tax-deductible up to a cap (currently the first million dollars of the loan). You’ll take this off on your Schedule A when you do your taxes.
An “origination point” is a fee that you pay to get the loan itself. If that’s really what it is, it’s tax-deductible too.
However, some lenders will try to roll all their charges into their origination fees, and the IRS does not want you to deduct charges that paid for services, such as faxing or attorney’s fees.
So to see if those points will be deductible, you need to look at your GFE, your Good Faith Estimate, which is a document that your lender sent you a few days before closing and then probably had you sign a copy of at closing.
That piece of paper itemizes the lender’s charges, and will help you figure out if they rolled everything up into one big ball of wax or not.
Also helpful will be the Form 1098 that your lending bank sends you. Box 2 will show points that the lender has reported as paid, so deducting those is a good place to start.
The two big wrinkles to look out for are:
1. Points paid on a refi or on the purchase of a secondary residence can be deducted, but they don’t all get deducted in the year of purchase, and
2. Points paid by you the buyer are deductible, but it’s possible that you can also deduct points paid by the seller (if there were any). As far as the IRS is concerned, when you turn around and sell, the points that the seller paid reduce the cost basis of your residence, so make a note in your files.
If you’re just having so much fun that you can’t stop thinking about all this, you can head over to the IRS site to look at Tax Topic 504, “Home Mortgage Points.” And you can find more MoneyWatch pointers about points plus other ways to save on 2009 taxes in Julian Block’s story on our site.
