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points deductible

Posted on: 13th Nov, 2006 11:27 am
I had taken a mortgage for buying a home in 1993 and this year I had refinanced that one for a 15 yr. $100,000 mortgage. For getting the new mortgage I had paid 3 points ($3000), 2 points were paid for the prepaid interest and the other point was charged for services, in place of amounts that are mentioned separately on the settlement statement. I had paid the points from my own private funds instead from the proceeds of the new loan. My first payment was on July 1 and I am a cash basis taxpayer. my question is that will all of the points will be deductible this year.
Hi Lumsden,

Since the funds from this new mortgage was used for repaying the existing mortgage and it was for your continued ownership of the home but was not for any new purchase or improvements to the home, the points you had paid will not be fully deductible this year.

But you will be able to deduct 2 points ($2000) ratably over the life of the loan, using the following calculation, ($2000 divided by 180 months) x the number of payments this year.

Suppose you make 6 payments this year then the amount you will be able to deduct this year: ($2000/180) x 6 = $67

The other point you paid equaling to $1000 was a fee for services and will not be deductible.

Thanks
Colin
Posted on: 13th Nov, 2006 11:44 am
Hi Lumsden,

Since you have done a refinance, the points will be deducted over the life of the new loan. Also, you can deduct only those points that are paid as prepaid interest and not as service charges.

If you wish to know more on the Criteria for Deducting Points, visit http://www.irs.gov/taxtopics/tc504.html

Feel free to consult us if you are in doubt.

Thanks,

Caron
Posted on: 13th Nov, 2006 10:08 pm
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