Your Tax Questions Answered

Some Points on Deducting Points

Kiplinger editorial director Kevin McCormally and fellow tax experts Peter Blank and Mary Beth Franklin tackle your most pressing tax challenges.

By Kevin McCormally, Editorial Director, Kiplinger.com

February 22, 2010

QUESTION: I read about a tax credit concerning closing costs that could be subtracted from the adjusted gross income to reduce a possible tax due if a person refinanced their mortgage in 2009.

KEVIN ANSWERS: Points paid to get a mortgage ... original or refi ... can be deducted, but not to reduce adjusted gross income. The points are deducted in the interest section of Schedule A of Form 1040, by taxpayers who itemize deductions.

When the points on are paid to purchase a home the full amount is deductible in the year paid.

When the points are paid on a refi, the points must be deducted ratably over the life of the loan. That means 1/30th a year if it’s a 30 year mortgage, and less than that in year 1 because the deduction has to be adjusted for when during the year you refinanced. If you refinanced on July 1, for example, just one-half of 1/30th of the amount paid would be deductible in year 1.

Now, if you refinance again, thus bringing an end to the life of the first refi mortgage, then any as yet undeducted points on that loan might be deductible in the year of the second refi. That’s the rule if you refinanced using a different lender. But if the new loan is from the same lender used for the first refi, any as yet undeducted points on the first refi are added to the points on the second, and deducted over the life of that loan.

Remember, we don’t make the rules. We just try to explain them. Good luck.

QUESTION: I am selling my home in Oregon. The buyer is asking me to pay $4,000 towards their closing costs. Is all or part of this tax deductible? The final papers have not been written up yet. The buyers estimate their closing costs to total $8,000. Is there specific verbiage I should put in the contract to ensure the $4,000 I am paying is for a line item that is deductible (i.e., points)?

KEVIN ANSWERS: Closing costs your pay for a buyer are not deductible ... by you. If you pay points for the buyer, he or she gets to deduct what you pay. The way the IRS sees it, you’re really reducing the price of the house by the closing costs you pay for the buyer -- $4,000 in your case. The payment does reduce the proceeds of the sale, which reduces your profit by $4,000. In most sales that is meaningless, of course, since most home-sale profit is tax-free. It’s taxable only if the profit exceeds $250,000 on a single return or $500,000 on a joint return, assuming you have owned the home for two of the five years leading up to the sale.

• Got a question? E-mail me directly at taxexperts@kiplinger.com. Want to be heard? Leave a reader comment below. We will answer as many as we can, but please understand we can't answer every question directly due to the large volume of queries submitted by your fellow readers. Please review our full policy and disclaimer here.

• Print
• Comments
• Email
• RSS