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	Tax HOME MORTGAGE INTEREST AND POINTS     Property Taxation: Depreciation Taxation of Profit Adjusted Basis Home Mortgage Interest and Points Deduction   1031 EXCHANGES Capital Gains Tax Corporate Tax Corporation Dividend Tax Double Taxation European Union Savings Taxation Homeowners exemption Foreign Investment in Real Property Tax Act. Flat Tax Principles of Income Tax Income taxes Inheritance Tax Installment Sales Poll Tax Progressive Tax Property taxes California Propositions Purposes and Effects of Taxation Retirement Tax Sales Tax Sales leaseback Tariff Tax Credit, Exemption Equivalent and Tax Tax Rates Tax Treaty Direct and Indirect Taxation Value Added Tax Interest is anything paid as compensation for the use of money. In order for interest to be deductible, there must be an existing, valid and enforceable obligation for the individual to pay a principal sum to pay interest on it. Cash -basis taxpayers can't deduct prepaid interest . They are sutomatically placed on the accrual basis. Taxpayers may only deduct interest in the year the interest represents a cost of using the borrowed money. Even if paid in cash in advance, it can never be fully deducted and must be charged to a capital account and deducted in the period to which it applies. Example: Shane buys a property for $50,000, paying $10,000 as cash down payment and assuming mortgage of $40,000. He also pays 5 years of interest in advance at the time of purchase, amounting to $20,000. Shane must deduct the interest expense monthly over the next five years, app. $4,000 per year. On the other side of transaction, the seller must report the entire $20,000 as interest income in the year of the sale. Points are deductible over the loan term . Points paid at the time of purchase or refinance, are considered similar to a prepayment of interest and are to be treated as paid over the term of the loan. This also applies to charges that are similar to points, such as loan origination fee, loan processing fees, pre premium charges, provided that they are to be paid for the use of the lender's money. Example: Suze paid $2,400 in points on a 20 year loan 240 monthly payments. Suze may deduct only $10 for each payment that is due next year. The remaining amount must be capitalized and deducted monthly over the remaining loan period. What expenses are considered points? Loan Processing Fee points paid by a borrower as compensation to a lender is considered to be interest. Loan origination fee points paid by borrower obtaining FHA loan are considered deductible interest points. What are not considered points? Charges for service, including the lender's services (appraisal fees, the cost of preparing mortgage or deed of trust, settlement fee) are not interest. They are similar to acquisition costs even tough the lender may characterize them as "points". Closing statement should designate points. The IRS permits the current deduction of points incurred when purchasing a principal residence if the following conditions are satisfied: 1) The loan is insured in connection with the purchase or improvement of a principal residence and the indebtedness is secured by that home 2) The payments of points in an established business practice in the area where the debt is created 3) The points do not exceed the amount generally charged in the area. 4) The Uniform Settlement Statement, HUD Form1, clearly designates the amounts as "points" incurred to procure the loan. Therefore, labels such as loan origination fees, loan discounts, discount points, service fee points, and commissions paid to a mortgage broker for arranging financing are acceptable. Loan Origination fee pints paid by the borrower to obtain FHA or VA loan are also deductible. 5) The points must be stated as a percentage of the principal amount borrowed 6) The amount must be paid directly by the taxpayer.   Points paid by seller are deductible by both buyer and seller. The IRS ruled that when a seller pays "points" on the sale of a principal residence, the buyer may deduct those points as interest, but both must subtract these points from the sales/purchase price. Seller paid points are viewed as an adjustment to the purchase price of the home when a certain requirements are met. Refinancing. Paints paid in refinancing a mortgage are not tax deductible in full in the year paid, regardless of how the taxpayer arranges to pay for them. This is true even if the new mortgage is secured by the taxpayer's principal residence. According to the IRS, points paid to refinance an existing home mortgage are for repaying the taxpayer's existing indebtedness, and they are not paid "in connection with" the purchase or improvement of the home. Therefore, taxpayers must deduct refinance points over the loan period. The IRS requires tax payers to deduct these points monthly over the term of the loan. If part of the process from the refinancing are used to improve the personal residence, the taxpayer must deduct a portion of the points in the tax year paid. Example: Suze paid $2400 in points on refinancing a 20 year loan involving 240 monthly payments on her principal residence. Suze may only deduct $10 for each payment that is due during the tax year.