Points Paid on a Home Purchase in 2022
Closing Disclosure Page 2, Section A – If the origination charges on Page 2, Section A of the Closing Disclosure include discount points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the year paid.
Other fees in this section (application, underwriting, processing, etc.) are NOT tax deductible. Only bona fide discount points are deductible if they are expressed as a percentage of the loan amount and paid in exchange for a lower interest rate.
The following table is from IRS Publication 936 detailing visually the only circumstances in which discount points may be deducted from your taxable income:
Points Paid on a Mortgage Refinance in 2022 ONLY Deductible if Used to Substantially Improve your Main Home.
Closing Disclosure Page 2, Section A – If the origination charges on Page 2, Section A of the Closing Disclosure include discount points paid to your mortgage company in exchange for a new loan including cash proceeds to substantially improve your primary residence, you can deduct those points in the following manner:
- You can deduct this year all points paid on the portion of the mortgage proceeds that were used for home improvements (if you received cash-out for home improvements). Remember, any points paid on the portion of the mortgage NOT used for home improvements must be spread out over the life of the loan.
- For example, assume you refinance an old $400,000 mortgage into a new $600,000 mortgage and walk away with $200,000 to be used for home improvements. In this case, 1/3 of your points are fully deductible this year and 2/3rds of your points are deductible over the life of the loan.
- As outlined above, other fees itemized in this section are NOT tax deductible.
Property Taxes (actual and pro-rated)
Closing Disclosure Page 2, Section F – Property taxes itemized in this section are generally tax deductible in the year they are paid. However, property tax escrows in section G are NOT tax deductible until they are actually paid by your mortgage company to the municipality (city, state, county).
Pre-paid Interest
Closing Disclosure Page 2, Section F – Mortgage interest is calculated in arrears. This means that your monthly mortgage payment actually covers the month that just passed. For example, your February payment covers the interest for the month of January, your March payment covers the interest for the month of February, and so on.
When you refinance a mortgage or buy a new home, you “skip” a month’s worth of mortgage payments. That is why you sometimes pay “pre-paid interest” or “daily interest charges” in Section F of the Closing Disclosure. These daily interest charges cover the interest for the current month. If your mortgage interest is deductible, then pre-paid interest that you pay in this section is also deductible (this will be included in the 1098 statement that you receive from your mortgage company).
Mortgage Insurance Premium (MIP) – NEW for 2022!
The itemized deduction for mortgage insurance premiums has expired. You can no longer claim the deduction for 2022. This also means the VA Funding Fee is no longer tax deductible this year.
Pre-Payment Penalties
A pre-payment penalty paid on an old loan would be deductible on your 2022 tax returns as long as the new loan was taken out from a different lender than the old loan.
Other Closing Costs
Closing costs not mentioned above are not tax deductible. However, they are added to your “tax basis” for purpose of calculating your capital gain when you sell the property. In other words, you may be able to reduce your capital gains tax (if applicable) when you sell the property in the future because your home purchase closing costs get added to your cost basis.
Distinction Between a Qualified Residence and an Investment Property
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.
Source: CMPS Institute
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