IRS Requirements

The IRS treats points as prepaid interest, and whether you can deduct them in the year you pay them depends on several tests. For a purchase-money mortgage on your main home, points are generally deductible in full in the year paid if the loan is secured by the home, the points are clearly shown as paid on the settlement statement, and they are computed as a percentage of the loan, among other conditions. Points on a refinance usually have to be deducted over the life of the loan instead of up front, unless part of the proceeds improve the home. As with any tax matter, confirm the details with a tax professional, because individual filing situations vary.

Deduction Rules

The deduction only matters if you itemize. If you take the standard deduction, and most recent buyers do, the points deduction does not reduce your tax bill in the year of purchase. When itemizing, points on a main-home purchase mortgage are deductible up to the limit on acquisition debt, which stands at $750,000 for loans taken out after December 2017. The amount of the points also has to be no more than the amount generally charged in the area, a rule the IRS calls "consistent with established business practice," so an outsized point charge can lose its deductibility.

Documentation

Keep the paper trail from closing: the Closing Disclosure, the settlement statement, and the lender's statement that itemizes the points paid. The IRS looks for points "clearly shown as paid" on your settlement paperwork, and the lender's final statement showing the charge is your best evidence. You will also want the note or loan agreement that shows the points were computed against the loan amount. File these with your tax records for the year of purchase, and keep them as long as you keep the rest of your home purchase documents.

Lender Credits Deduction

Lender credits are the mirror image of points, and they have the opposite tax effect. A lender credit is a payment from the lender toward your closing costs in exchange for a higher rate, and it is not a deductible expense because you did not pay it. You also cannot deduct points someone else paid for you, such as points a seller or builder covered as a concession. The practical takeaway: the same buydown funded by seller or lender money instead of your own does not generate a deduction for you. The lower payment is still real; the deduction just does not travel with it.

Year of Deduction

Timing rules decide which tax year gets the deduction. Points you pay at closing on a purchase-mortgage loan are typically deductible in the year you close, as long as the loan qualifies for immediate deduction. Points on a refinance are generally deductible ratably over the loan term, so a $4,000 refinance point charge on a 30-year loan adds roughly $133 a year to your itemized deduction until it is fully claimed. If you refinance again before the points are fully deducted, the remaining balance can usually be deducted in the year of the new refinance. A tax professional can walk your exact dates and amounts through the rules.