Are Mortgage Points Tax Deductible? A Guide

Homeowners are often unaware of all the ways they can make use of their largest asset—home equity. One great example is with property taxes.  

Consider: Are mortgage points tax deductible? Yes, you can deduct mortgage points from your taxes. That said, deducting mortgage points doesn’t typically happen all at once. It can occur in the year you buy a house, over the full life of the loan, or be concentrated in the year you sell the property. 

Plus, it isn’t always worth it to do so. Some homeowners will opt to forgo mortgage point deductions depending on how their itemizing stacks up to standard deduction amounts. 

What Are Mortgage Points?

Mortgage points, or discount points, are a way to buy down your mortgage interest rate at the time of a home purchase. When you close on a loan, most lenders will allow you to purchase up to four mortgage points. Each home mortgage point typically: 

1. Costs one percent of the total loan amount at time of closing
2. Reduces the interest rate of the loan by 0.25%¹

Mortgage Point Deduction Process and Limits

The government uses tax laws as carrots and sticks to steer citizens toward behavior deemed desirable for the economy. One way to encourage investment-related activities—including buying homes—is to limit taxation on the cost of borrowing money to invest. 

Mortgage points are a type of prepaid interest, and as such, are generally deductible by way of itemized deductions using Schedule A of a federal income tax return. It’s one of the tax benefits of buying a home.

The deductibility of mortgage discount points depends on when you purchased the relevant property. You can deduct points on a mortgage loan up to²: 

• $750,000 for property purchased after December 15, 2017
• $1 million for property purchased before December 15, 2017

If you file taxes as married filing separately (MFS) those amounts are halved to $375,000 and $500,000.³

How to Deduct Mortgage Points in the Year Paid

Are mortgage points tax deductible immediately? The year in which you buy property can be a bit complicated for your tax preparation. One of the mysteries to solve is whether you can deduct the entire cost of your mortgage points in the year you paid for them or if you have to spread the cost over several tax years.

You can deduct the full value of your mortgage discount points in the year of their purchase if you meet all of these nine requirements.⁴ You must: 

1. Occupy the mortgaged property as your principal residence
2. Use the cash method of accounting for tax purposes
3. Provide a downpayment higher than the combined cost of the mortgage points purchased
4. Be in an area where the use of mortgage discount points is common practice

The points cannot be: 

5. Applied to closing costs
6. Unusually high
7. Paid in place of any separate line items on the settlement statement (property taxes, fees, inspection, title, etc.)

Finally, the paying points must also: 

8. Be computed as a percentage of your loan
9. Appear on your settlement statement

Cover all these nine requirements properly, and you can be looking at a sweetened tax season.

How to Deduct Mortgage Points Over the Life of the Loan

Are mortgage interest points tax deductible over the life of the loan? If you don’t meet the nine requirements above, or simply prefer it, you can deduct your mortgage points ratably (equally) over your repayment period. However, you still need to meet the following guidelines:

You must: 

1. Use the cash method of accounting
2. Secure the loan by a home (doesn’t have to be principal residence)
3. Have a loan duration no longer than 30 years
4. Have loan terms similar to others in your area if your loan period is more than 10 years

Additionally, at least one of these must be true: 

• Your loan amount is no more than $250,000
• You have a maximum of 4 points on a loan period of 15 years or less
• You have a maximum of 6 points on a loan period longer than 15 years

Looking for More Ways to Save?

After years of paying down your mortgage loan while your property grows in value, you could be sitting on a five- to seven-figure goldmine to fund investments, lifestyle transitions, or whatever your family needs to grow and prosper. 

Accessing your equity doesn’t require you to decide between leveraging your property for more debt or putting a for-sale sign in your yard and packing up your treasures. A sell and stay transaction can turn your equity to cash with no debt—and without having to move out of your home. 

With Truehold, you can close on the sale of your home and sign a lease agreement. You’ll get: 

• A competitive rent rate
• A competitive price for your home
• The right to remain in your home as a renter if you fulfill the lease

Ready to find out if Truehold's sell and stay transaction is right for you? Call us today and speak with a Truehold representative to review the process and answer any questions. 

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Sources: 

1. Bankrate. Mortgage points: What are they and how do they work? https://www.bankrate.com/mortgages/mortgage-points/
2. FRED.  30-Year Fixed Rate Mortgage Average in the United States. https://fred.stlouisfed.org/series/MORTGAGE30US
3. Nerdwallet. Mortgage Interest Tax Deduction: Definition, What Qualifies. https://www.nerdwallet.com/article/taxes/mortgage-interest-rate-deduction
4. FRED.  Median Sales Price of Houses Sold for the United States. https://fred.stlouisfed.org/series/MSPUS‍