Buying a home can have extra tax benefits in the year the home was purchased.
Knowing which costs shown on the Settlement Statement, from the Housing and Urban Development Administration, are deductible can lower the amount of taxable income on your tax return.
The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage.
Points may also be called loan origination fees, maximum loan charges, loan discount or discount points.
Normally, points are listed on the 1098 Mortgage Interest statement distributed at the end of the year.
However, there are many incidents when the points paid at time of purchase are not reported on the 1098.
To report deductible points when they are not listed on the 1098 Mortgage Statement, it is necessary to look on the Settlement Statement issued by the title company when you signed for the home loan. Lines 801 and 802 on the Settlement Statement will show the amount of points or origination fees paid at the time you purchased the home.
In order for these fees to be fully deductible in the year purchased, the following conditions must be true:
* The loan is secured by the taxpayer's main home.
* Paying points is an established business practice in the area.
* The points paid were not more than the points generally charged in that area.
* The taxpayer uses the cash method of accounting, which is normally the case.
* The points were not paid in place of separately stated items such as appraisal fees, inspection fees, title fees, attorney fees and property taxes.
* The funds the taxpayer paid at closing, plus any seller paid points, were at least as much as the points charged. The funds paid can include a down payment, an escrow deposit and earnest money.
* The loan is used to buy or build the taxpayer's main home, not a second home.
* The points were computed as a percentage of the principal amount of the mortgage.
* The points are clearly shown on the Settlement Statement as points charged for the mortgage.
If the seller paid the points on the home, the points are treated as having been paid by the buyer making these deductible.
Can you deduct the points for refinancing the home? It depends. If part of the refinanced mortgage money was used to finance improvements to your home and if you meet the first six tests above, the points associated with your home improvements may be fully deductible in the year you paid the points.
Be careful to check to see if the above six tests are met before deducting points on a refinanced loan.
If the above tests are not true, you must deduct the points/origination fees over the life of the loan.
For more information on deducting points or origination fees, go the Internal Revenue Service website at www.irs.gov and type "Publication 936" in the search engine.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at firstname.lastname@example.org.