Publication 936 - Home Mortgage Interest Deduction - Department Of Treasury

Home improvement loan. You can also fully

you receive it. However, you need to include it

5. Either your loan amount is $250,000 or

only up to the amount of the deduction that

deduct in the year paid points paid on a loan to

less, or the number of points is not more

reduced your tax in the earlier year. This is true

improve your main home, if tests (1) through (6)

than:

whether the interest overcharge was refunded to

are met.

a. 4, if your loan period is 15 years or less,

you or was used to reduce the outstanding prin-

Second home. You cannot fully de-

cipal on your mortgage. If you need to include

duct in the year paid points you pay on

the refund in income, report it on Form 1040, line

b. 6, if your loan period is more than 15

loans secured by your second home.

CAUTION

21.

years.

You can deduct these points only over the life of

If you received a refund of interest you over-

the loan.

paid in an earlier year, you generally will receive

a Form 1098, Mortgage Interest Statement,

Refinancing. Generally, points you pay to

Example. You use the cash method of ac-

showing the refund in box 3. For information

refinance a mortgage are not deductible in full in

counting. In 2008, you took out a $100,000 loan

about Form 1098, see

Form 1098, Mortgage

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

payable over 20 years. The terms of the loan are

Interest Statement,

later.

new mortgage is secured by your main home.

the same as for other 20-year loans offered in

However, if you use part of the refinanced

For more information on how to treat refunds

your area. You paid $4,800 in points. You made

mortgage proceeds to improve your main home

of interest deducted in earlier years, see Recov-

3 monthly payments on the loan in 2008. You

and you meet the first 6 tests listed under De-

eries in Publication 525, Taxable and Nontax-

can deduct $60 [($4,800 ÷ 240 months) x 3

duction Allowed in Year Paid, you can fully de-

able Income.

payments] in 2008. In 2009, if you make all

duct the part of the points related to the

twelve payments, you will be able to deduct

Cooperative apartment owner. If you own

improvement in the year you paid them with your

$240 ($20 x 12).

a cooperative apartment, you must reduce your

own funds. You can deduct the rest of the points

home mortgage interest deduction by your

over the life of the loan.

share of any cash portion of a patronage divi-

Deduction Allowed in Year Paid

dend that the cooperative receives. The patron-

Example 1. In 1994, Bill Fields got a mort-

age dividend is a partial refund to the

gage to buy a home. In 2008, Bill refinanced that

You can fully deduct points in the year paid if you

cooperative housing corporation of mortgage in-

mortgage with a 15-year $100,000 mortgage

meet all the following tests. (You can use Figure

terest it paid in a prior year.

loan. The mortgage is secured by his home. To

B as a quick guide to see whether your points

If you receive a Form 1098 from the coopera-

get the new loan, he had to pay three points

are fully deductible in the year paid.)

tive housing corporation, the form should show

($3,000). Two points ($2,000) were for prepaid

only the amount you can deduct.

1. Your loan is secured by your main home.

interest, and one point ($1,000) was charged for

(Your main home is the one you ordinarily

services, in place of amounts that ordinarily are

Points

live in most of the time.)

stated separately on the settlement statement.

Bill paid the points out of his private funds, rather

2. Paying points is an established business

The term “points” is used to describe certain

than out of the proceeds of the new loan. The

practice in the area where the loan was

charges paid, or treated as paid, by a borrower

payment of points is an established practice in

made.

to obtain a home mortgage. Points may also be

the area, and the points charged are not more

called loan origination fees, maximum loan

3. The points paid were not more than the

than the amount generally charged there. Bill’s

charges, loan discount, or discount points.

first payment on the new loan was due July 1.

points generally charged in that area.

He made six payments on the loan in 2008 and

A borrower is treated as paying any points

4. You use the cash method of accounting.

is a cash basis taxpayer.

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

This means you report income in the year

Bill used the funds from the new mortgage to

gage. See

Points paid by the seller,

later.

you receive it and deduct expenses in the

repay his existing mortgage. Although the new

year you pay them. Most individuals use

mortgage loan was for Bill’s continued owner-

this method.

ship of his main home, it was not for the

General Rule

purchase or improvement of that home. He can-

5. The points were not paid in place of

You generally cannot deduct the full amount of

not deduct all of the points in 2008. He can

amounts that ordinarily are stated sepa-

deduct two points ($2,000) ratably over the life of

points in the year paid. Because they are pre-

rately on the settlement statement, such as

the loan. He deducts $67 [($2,000 ÷ 180

paid interest, you generally deduct them ratably

appraisal fees, inspection fees, title fees,

months) × 6 payments] of the points in 2008.

over the life (term) of the mortgage. See

Deduc-

attorney fees, and property taxes.

The other point ($1,000) was a fee for services

tion Allowed

Ratably, next.

6. The funds you provided at or before clos-

and is not deductible.

For exceptions to the general rule, see

De-

ing, plus any points the seller paid, were at

duction Allowed in Year

Paid, later.

least as much as the points charged. The

Example 2. The facts are the same as in

funds you provided do not have to have

Example 1, except that Bill used $25,000 of the

been applied to the points. They can in-

Deduction Allowed Ratably

loan proceeds to improve his home and $75,000

clude a down payment, an escrow deposit,

to repay his existing mortgage. Bill deducts 25%

($25,000 ÷ $100,000) of the points ($2,000) in

If you do not meet the tests listed under Deduc-

earnest money, and other funds you paid

2008. His deduction is $500 ($2,000 × 25%).

tion Allowed in Year Paid, later, the loan is not a

at or before closing for any purpose. You

home improvement loan, or you choose not to

cannot have borrowed these funds from

Bill also deducts the ratable part of the re-

maining $1,500 ($2,000 − $500) that must be

deduct your points in full in the year paid, you

your lender or mortgage broker.

can deduct the points ratably (equally) over the

spread over the life of the loan. This is $50

7. You use your loan to buy or build your

life of the loan if you meet all the following tests.

[($1,500 ÷ 180 months) × 6 payments] in 2008.

main home.

The total amount Bill deducts in 2008 is $550

1. You use the cash method of accounting.

($500 + $50).

8. The points were computed as a percent-

This means you report income in the year

age of the principal amount of the mort-

you receive it and deduct expenses in the

gage.

year you pay them. Most individuals use

Special Situations

9. The amount is clearly shown on the settle-

this method.

ment statement (such as the Settlement

This section describes certain special situations

2. Your loan is secured by a home. (The

Statement, Form HUD-1) as points

that may affect your deduction of points.

home does not need to be your main

charged for the mortgage. The points may

home.)

Original issue discount. If you do not qualify

be shown as paid from either your funds or

to either deduct the points in the year paid or

3. Your loan period is not more than 30

the seller’s.

deduct them ratably over the life of the loan, or if

years.

you choose not to use either of these methods,

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

4. If your loan period is more than 10 years,

the points reduce the issue price of the loan.

choose to either fully deduct the points in the

the terms of your loan are the same as

This reduction results in original issue discount,

other loans offered in your area for the

year paid, or deduct them over the life of the

which is discussed in chapter 4 of Publication

same or longer period.

loan.

535.

Publication 936 (2008)

Page 5

Publication 936 - Home Mortgage Interest Deduction - Department Of Treasury - 2008 Page 5

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