Tax Deductions for Home Loans

Homeowners should be aware of the tax deductions allowed by the IRS resulting from the loan origination process.  This blog post highlights some of the appropriate deductions you should discuss with your tax advisor.

Points are sometimes referred to as “loan discounts” or “loan origination fees” and they represent money which the buyer must pay to the lender.  Points are not usually included in the total loan amount and are usually paid by the buyer in cash at closing.  One point equals 1% of the total mortgage amount.  If the total amount of the loan is $350,000, one point on a loan of that size would be $3,500.  The amount the buyer pays for points can be deducted in full in the year they are paid.

Most of us live in several different homes over our lifetime.  Consequently, after living in a home for several years, we may want to sell it and buy a larger home.  At this time, when we buy our next home, our initial mortgage is paid off.  Some mortgages have a built-in prepayment penalty while others do not.  If you have paid off a penalty of this type, this is considered a valid tax deduction.

If the buyer or seller needs to pay a pro-rated portion of the real estate taxes at closing that can also be deducted at the year’s end.

These loan related deductions are taken during a single tax year (the year that you bought and paid closing costs or the year that you sold and paid a prepayment penalty).  These deductions are in addition to the usual mortgage interest deduction that most homeowners take advantage of.  The mortgage interest can be deducted each year along with the property taxes.