The term "points" is used to describe certain charges paid to obtain a home mortgage. Points may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF). If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. For information on deducting interest, refer to Tax Topic 505.

You can deduct the points in full in the year they are paid, if all the following requirements are met:

• You are legally liable for the debt and the loan is secured by your main home (your main home is the one you live in most of the time).
• Paying points is an established business practice in your area.
• The points paid were not more than the amount generally charged in that area.
• You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay the points.
• The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
• You provided funds at or before closing, that were at least as much as the points charged, not counting points paid by the seller. You cannot have borrowed the funds from your lender or mortgage broker.
• You use your loan to buy or build your main home.
• The points were computed as a percentage of the principal amount of the mortgage, and
• The amount is clearly shown on your settlement statement.

Points that do not meet these requirements may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated previously, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the seller's return, but can be claimed as a selling expense which will reduce the amount of gain realized. Points paid by the seller may not be deducted by the buyer and may not be treated as part of the basis, or cost, of the residence. Points you pay on loans secured by your second home, can be deducted only over the life of the loan. You may be subject to a limit on some of your itemized deductions including points. For 2002, this limit applies if your adjusted gross income is more than $132,950, or $66,475 if you are married filing separately.

For more information on points, refer to Publication 936 (PDF), Home Mortgage Interest Deduction.

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