With certain limitations, points paid (i.e. prepaid interest) on the acquisition of a qualified residence are deductible in the year paid. The treatment of points paid on a refinancing are more complicated.
Points paid on a refinancing are generally deducted ratably over the life of the mortgage, subject to the limitations that the mortgage must be either home acquisition debt (limit $1,000,000) or home equity debt (limit $100,000). However, if you refinance more than the original mortgage and use the excess proceeds (subject to the limitations) to improve your qualified residence, you can deduct the points on the excess mortgage in the year paid. If the extra refinance proceeds are used for another purpose, you can deduct all the points ratably over the life of the new mortgage up to $100,000 of additional mortgage debt (home equity debt limitations).
The IRS’s takes the position that the treatment of unamortized points on a loan that is refinanced may depend on whether you refinance with the same or a different lender. In order to avoid potential disputes later, note the following IRS positions on points paid on a refinancing. Generally, if you refinance with a different lender, you can deduct any remaining unamortized points on the old loan. However, when refinancing with the same lender, any unamortized points on the existing mortgage plus the points on the new mortgage are added together and deducted ratably over the new loan period.
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Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.