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Understanding Deducting Mortgage Points and Your Denver Taxes


What are mortgage points and how do I deduct them on my taxes?

A mortgage point is defined as 1% of your mortgage. If your home loan is $200,000, then a mortgage point is equal to $2,000. There are two types of points, origination points and discount points. Discount points are often deductible and are a type of prepaid interest. Origination points are income for the loan originator.

How do mortgage point deductions work?

In most cases, the IRS lets you deduct points for the full amount you pay for them.  They are considered an itemized deductions and are claimed on Schedule A of Form 1040. The IRS has the following requirements when deducting mortgage points:

• The mortgage must be used to buy or build your primary residence
• The amount of points paid must not be excessive for your area
• You must use cash accounting on your taxes
• The points must not be used for items that are typically stand-alone fees, such as property taxes
• You cannot have borrowed the funds to pay for the points from the mortgage lender or broker
• The amount you pay must be clearly itemized as points on your statement
 
It’s important to remember when purchasing a home, that mortgage points must be paid upfront along with your down payment and can have a huge effect on home affordability. Additionally, if you don’t follow the IRS rules exactly, you may not qualify for a tax deduction. Buying a home is exciting, make sure you make the most of it! Call your Denver accountant today to get the help and advice you need when it comes to mortgage points.