| Personal Residence / Deductibility of points—refinancing of personal residence |  |
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In general, in order to deduct
points paid in connection with a residential mortgage, the points must
be "qualified residence interest." In addition, even where
points are deductible, certain other requirements, as discussed below,
must be satisfied in order to deduct them in the year they are paid (as
opposed to being written off over the term of the mortgage). In order for interest (including points) paid in connection
with a refinancing mortgage to be "qualified residence
interest," the mortgage must be with respect to, and secured by,
either your principal residence or one second residence which you
select. In addition, the mortgage proceeds must either be used to make
substantial improvements to the home, or must not exceed the principal
amount of your old mortgage by more than $100,000 ($50,000 if you are
married and file a separate return). Even where "points" paid
on a refinancing are "qualified residence interest," they will
only be deductible in the year paid (1)if they relate to your principal
residence (not a second residence); (2)to the extent that they are
consistent with local business practice on this type of loan; and (3)to
the extent they relate to the portion of the mortgage which is used to
finance improvements to the home. In other words, points attributable to the portion of the new mortgage which is used to repay the old mortgage cannot be deducted when paid, but may be deducted over the life of the new mortgage (or when it is prepaid). Similarly, to the extent the proceeds of the new mortgage exceed the principal amount of the old mortgage and are used for purposes other than improving the property, no current deduction is permitted; however, the points may be deducted over the term of the new loan to the extent the excess principal amount does not exceed $100,000. |
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