Publication 936 - Home Mortgage Interest Deduction

you or was used to reduce the outstanding prin-

earnest money, and other funds you paid

tests is not met, the buyer deducts the points

cipal on your mortgage. If you need to include

at or before closing for any purpose. You

over the life of the loan.

the refund in income, report it on line 21, Form

cannot have borrowed these funds from

If you need information about the basis of

1040.

your lender or mortgage broker.

your home, see Publication 523 or Publication

If you received a refund of interest you over-

530.

7) You use your loan to buy or build your

paid in an earlier year, you generally will receive

main home.

Funds provided are less than points. If you

a Form 1098, Mortgage Interest Statement,

meet all the tests in the Exception, earlier, ex-

8) The points were computed as a percent-

showing the refund in box 3. For information

cept that the funds you provided were less than

age of the principal amount of the mort-

about Form 1098, see Mortgage Interest State-

the points charged to you (test (6)), you can

gage.

ment, later.

deduct the points in the year paid, up to the

For more information on how to treat refunds

9) The amount is clearly shown on the settle-

amount of funds you provided. In addition, you

of interest deducted in earlier years, see Recov-

ment statement (such as the Uniform Set-

can deduct any points paid by the seller.

eries in Publication 525, Taxable and Nontax-

tlement Statement, Form HUD-1) as points

able Income.

charged for the mortgage. The points may

Example 1. When you took out a $100,000

Cooperative apartment owner. If you own

be shown as paid from either your funds or

mortgage loan to buy your home in December,

a cooperative apartment, you must reduce your

the seller’s.

you were charged one point ($1,000). You meet

home mortgage interest deduction by your

all the tests for deducting points in the year paid,

share of any cash portion of a patronage divi-

except the only funds you provided were a $750

Note. If you meet all of these tests, you can

dend that the cooperative receives. The patron-

down payment. Of the $1,000 charged for

choose to either fully deduct the points in the

age dividend is a partial refund to the

points, you can deduct $750 in the year paid.

year paid, or deduct them over the life of the

cooperative housing corporation of mortgage in-

You spread the remaining $250 over the life of

loan.

terest it paid in a prior year.

the mortgage.

Home improvement loan. You can also

If you receive a Form 1098 from the coopera-

fully deduct in the year paid points paid on a loan

Example 2. The facts are the same as in

tive housing corporation, the form should show

to improve your main home, if tests (1) through

Example 1, except that the person who sold you

only the amount you can deduct.

(6) above are met.

your home also paid one point ($1,000) to help

Points

you get your mortgage. In the year paid, you can

Second home. The Exception does

deduct $1,750 ($750 of the amount you were

not apply to points you pay on loans

charged plus the $1,000 paid by the seller). You

The term “points” is used to describe certain

secured by your second home. You

CAUTION

spread the remaining $250 over the life of the

charges paid, or treated as paid, by a borrower

can deduct these points only over the life of the

mortgage. You must reduce the basis of your

to obtain a home mortgage. Points may also be

loan.

home by the $1,000 paid by the seller.

called loan origination fees, maximum loan

charges, loan discount, or discount points.

Exception does not apply. If you do not

Excess points. If you meet all the tests in the

A borrower is treated as paying any points

qualify under the exception, or choose not, to

Exception, earlier, except that the points paid

that a home seller pays for the borrower’s mort-

deduct the full amount of points in the year paid,

were more than generally paid in your area ( test

gage. See Points paid by the seller, later.

see Points in chapter 5 of Publication 535 for the

(3)), you deduct in the year paid only the points

rules on when and how much you can deduct.

that are generally charged. You must spread

General rule. You generally cannot deduct

However, if the points relate to refinancing a

any additional points over the life of the mort-

the full amount of points in the year paid. Be-

home mortgage, see Refinancing, later.

gage.

cause they are prepaid interest, you generally

Amounts charged for services. Amounts

must deduct them over the life (term) of the

Mortgage ending early. If you spread your

charged by the lender for specific services con-

mortgage.

deduction for points over the life of the mort-

nected to the loan are not interest. Examples of

gage, you can deduct any remaining balance in

Exception. You can fully deduct points in

these charges are:

the year the mortgage ends. However, if you

the year paid if you meet all the following tests.

refinance the mortgage with the same lender,

(You can use Figure B as a quick guide to see

1) Appraisal fees,

you cannot deduct any remaining balance of

whether your points are fully deductible in the

2) Notary fees,

spread points. Instead, deduct the remaining

year paid.)

balance over the term of the new loan.

3) Preparation costs for the mortgage note or

1) Your loan is secured by your main home.

A mortgage may end early due to a prepay-

deed of trust,

(Your main home is the one you ordinarily

ment, refinancing, foreclosure, or similar event.

4) Mortgage insurance premiums, and

live in most of the time.)

Example. Dan paid $3,000 in points in 1993

5) VA funding fees.

2) Paying points is an established business

that he had to spread out over the 15-year life of

practice in the area where the loan was

You cannot deduct these amounts as points

the mortgage. He had deducted $2,000 of these

made.

either in the year paid or over the life of the

points through 2002.

mortgage. For information about the tax treat-

3) The points paid were not more than the

Dan prepaid his mortgage in full in 2003. He

ment of these amounts and other settlement

points generally charged in that area.

can deduct the remaining $1,000 of points in

fees and closing costs, get Publication 530.

2003.

4) You use the cash method of accounting.

This means you report income in the year

Points paid by the seller. The term “points”

Refinancing. Generally, points you pay to

you receive it and deduct expenses in the

includes loan placement fees that the seller

refinance a mortgage are not deductible in full in

year you pay them. Most individuals use

pays to the lender to arrange financing for the

the year you pay them. This is true even if the

this method.

buyer.

new mortgage is secured by your main home.

However, if you use part of the refinanced

5) The points were not paid in place of

Treatment by seller. The seller cannot de-

mortgage proceeds to improve your main

amounts that ordinarily are stated sepa-

duct these fees as interest. But they are a selling

home and you meet the first 6 tests listed under

rately on the settlement statement, such

expense that reduces the amount realized by

Exception, earlier, you can fully deduct the part

as appraisal fees, inspection fees, title

the seller. See Publication 523 for information

of the points related to the improvement in the

fees, attorney fees, and property taxes.

on selling your home.

year you paid them with your own funds. You

6) The funds you provided at or before clos-

Treatment by buyer. The buyer reduces

can deduct the rest of the points over the life of

ing, plus any points the seller paid, were at

the basis of the home by the amount of the

the loan.

least as much as the points charged. The

seller-paid points and treats the points as if he or

funds you provided do not have to have

she had paid them. If all the tests under the

Example 1. In 1991, Bill Fields got a mort-

been applied to the points. They can in-

Exception, earlier, are met, the buyer can de-

gage to buy a home. In 2003, Bill refinanced that

clude a down payment, an escrow deposit,

duct the points in the year paid. If any of those

mortgage with a 15-year $100,000 mortgage

Page 5

Publication 936 - Home Mortgage Interest Deduction - 2003 Page 5

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