When the House Isnt Your Home

The right to deduct points fully in the year paid applies only to points paid on a mortgage to buy or improve your principal residence. Different rules apply to points charged for a mortgage used to buy a vacation home or rental property.

When points are not fully deductible in the year paid, the expense can be deducted instead over the life of the loan. On a 30-year mortgage, for example, one-thirtieth of the points generally would be deducted each year. In the first and last years, however, an even smaller amount would be deductible, based on the month you bought the house.

An alternative method for figuring the annual deduction gives you somewhat higher write-offs in the early years of a mortgage. It's probably more trouble than it's worth because it involves finding what percentage of the total interest due on the loan is paid yearly and deducting that portion of the points in that year.

Whichever method you use, remember to claim this deduction each year. If you pay off the loan early—because you sell the place, for example, or refinance at an even lower rate—you can deduct all undeducted points at that time.

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