- Points represent a type of prepaid interest on a mortgage. One point represents one percent of the value of a mortgage. For example, if the amount of the mortage is $200,000, one point would be $2,000. In the case of a mortgage loan that is backed by the U.S./ Veterans Affairs Department (VA) or the Federal Housing Administration (FHA), points are often broken down into a fee for loan origination and discounted points. Although points are usually deductible, they are not if the lender includes other items in the points calculation, such as an appraisal of the home or if the cash you put into the deal does not exceed the number of points that you paid. If the points you pay are for a primary residence, you can deduct all the points in the first year; however, if your mortgage is for a secondary residence, the points paid must be allocated and deducted on a prorated basis over the life of the loan.
- If the seller has paid real estate taxes for a period when you will own the home, these taxes may be deducted. In addition, if the date you close is not on the first of the month and the seller has made property tax payments for the period after you have purchased the home, payments for that period are tax deductible.
- To claim buyer interest closing cost deductions, obtain a 1098 from your mortgage company. They are required to furnish this information to you. Make note of the interest paid for the tax year. The two types of interest are points and prepaid interest.
- Get a copy of the real estate tax bill for your property. Calculate the number of days you owned the purchased property, including the date of sale and divide that by 365. Multiply the resulting number times the real estate tax bill to arrive at the amount of real estate taxes you can deduct. Add the points paid as part of the mortgage closing costs to the interest paid and report the total on Schedule A of your tax return.
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