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This section describes certain special situations that may affect your deduction of points.
Original issue discount:
If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. This reduction results in original issue discount, which is discussed in chapter 4 of IRS Publication 535.Amounts charged for services:
Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:
Appraisal fees,
Notary fees, and
Preparation costs for the mortgage note or deed of trust.
You cannot deduct these amounts as points either in the year paid or over the life of the mortgage.
Points paid by the seller:
The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.Treatment by seller:
The seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller. See Publication 523 for information on selling your home.Treatment by buyer:
The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. If all the tests under Deduction Allowed in Year Paid, earlier, are met, the buyer can deduct the points in the year paid. If any of those tests are not met, the buyer deducts the points over the life of the loan.If you need information about the basis of your home, see IRS Publication 523 or IRS Publication 530.
Funds provided are less than points. If you meet all the tests in Deduction Allowed in Year Paid, earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. In addition, you can deduct any points paid by the seller.
Example 1.
When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Of the $1,000 charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.Example 2.
The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You spread the remaining $250 over the life of the mortgage. You must reduce the basis of your home by the $1,000 paid by the seller.Excess points:
If you meet all the tests in Deduction Allowed in Year Paid, earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.Mortgage ending early:
If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.
Example.
Dan paid $3,000 in points in 1997 that he had to spread out over the 15-year life of the mortgage. He had deducted $2,000 of these points through 2006.Dan prepaid his mortgage in full in 2007. He can deduct the remaining $1,000 of points in 2007.
Limits on deduction. You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II. See the Table 1 Instructions for line 10.
Form 1098. The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. See Form 1098, Mortgage Interest Statement, later.
From IRS Publication 936
All Chapters concerning this topic: home mortgage interest; secured debt; qualified home; Special Situations; Points; Mortgage Insurance Premiums; Form 1098, Mortgage Interest Statement; How To Report; Special Rule for Tenant-Stockholders; Home Acquisition Debt; Home Equity Debt; Grandfathered Debt
