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Weak housing prices are a seller’s nightmare, but a boon for buyers able to scoop up a bargain. Although most expenses connected with buying a home are not deductible, there's a big exception when it comes to points paid to get a mortgage. Each point is 1% of the mortgage amount. So if you pay two points on a $200,000 mortgage, that's $4,000.
When the house you're buying is your principal residence, the entire expense is deductible in the year you pay it. And, get this: You're permitted to deduct the points even if you persuade the seller to pay them for you.
There's a different rule for points paid when refinancing a home loan. But closing the deal by year-end could still pay off. Points paid on refinancing are deducted over the life of the loan. That means you deduct 1/30th of the cost each year on a 30-year mortgage, for example.
But if you use part of your new loan to improve your home, you may be entitled to a larger first-year deduction. Points relating to the portion of the loan used for home improvements may be fully deductible in the year you pay them. For example, say you refinance a mortgage with an outstanding balance of $80,000 with a new, lower-rate loan for $100,000. If you use the proceeds of the new mortgage to pay off the old loan and to pay for $20,000 of home improvements, you can deduct 20% of the points you pay on this year’s return.
And if you're among the millions of serial refinancers -- homeowners who have refinanced more than once -- closing by December 31 could buy you a big write-off.
Some homeowners, concerned about mortgage-market meltdown, are racing to trade their adjustable-rate mortgages for fixed-rate notes. When you refinance a loan that resulted from a previous refinancing, that ends the life of the first refinancing and means that all of the yet -- undeducted points can be written off at once. (One exception to this: If you refinance with the same lender that holds your current loan, undeducted points on the loan you're refinancing are deducted over the life of the new loan.)
Bottom line: If you're close to closing, check with the officials involved to see if you can speed things up to accelerate the tax benefit.
POSTED BY: rj (November 26, 2008 01:03 AM)
Be careful. Make sure you have more than the standard deduction, including the points, before doing this. Otherwise the deduction is lost. In many cases it might be best to wait until after 2008 to close. That way, you will usually be assured that not only the points are deductible but also the yearly interest and taxes. So be very careful. You might want to visit a local Enrolled Agent in your town to see just what is best in your case.
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