When Can I Deduct Mortgage points?

It is easy to get confused about mortgage points.  They have different names like discount fee or origination fee and a lot of tax preparers and lenders might simply say that they are not deductible perhaps missing out on a tax planning opportunity to accelerate this valuable deduction in the current year. 

The General rules are that the points are amortized (deducted over the lifetime of the loan) HOWEVER the exception*** is generally applicable to consumer lending when the IRS multi-prong tests are met.  This flow chart (see below) is very helpful and summarizes the tests that allow for full deduction in the year paid.   The toughest one is #6 and it just means that you have to buy your points with cash in addition to your down payment amount.

***Deduction Allowed in Year Paid

Here are is the text of the tests:

You can fully deduct points in the year paid if you meet all the following tests. (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid.)

  1. Your loan is secured by your main home. (Your main home is the one you ordinarily live in most of the time.)

  2. Paying points is an established business practice in the area where the loan was made.

  3. The points paid were not more than the points generally charged in that area.

  4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.

  5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.

  6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided are not required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.

  7. You use your loan to buy or build your main home.

  8. The points were computed as a percentage of the principal amount of the mortgage.

  9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.


If you meet all of these tests, you can choose to either fully deduct the points in the year paid, OR deduct them over the life of the loan.

Home improvement loan.   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met.

Second home. You cannot fully deduct in the year paid points you pay on loans secured by your second home. You can deduct these points only over the life of the loan.

Refinancing.   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. This is true even if the new mortgage is secured by your main home.

However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.