For home buyers, deductible expenses include settlement charges for points. Deductible points are upfront charges for the use of money (not services). One point equals 1% of the loan amount. Points paid by either the buyer or seller are deductible by the buyer in the year of the home purchase. Although some closing service fees are quoted as “points,” they are not deductible, unless specified as such on the Closing Disclosure Form, under “Loan Costs” tab, under “Origination Charges.”

If you paid discount points when refinancing your home, be aware that you may not deduct them in full during the tax-year of the refinancing. Instead, you must prorate the deduction over the life of the loan. For example, $3,000 in points paid for a 15-year-term refinanced loan would equal a deduction of $200 ($3,000 ÷ 15 = $200) per year—unless the home is sold before the end of the loan term or refinanced with another lender, at which time all remaining points can be deducted on that year’s return.

HELPFUL HINT: Home buyers should consider having sellers pay their points (instead of other fees) to increase the buyer’s tax deduction.

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