Deduction of points with mortgage interest limitation

Technical topics regarding tax preparation.
#1
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HI Pros, I hope everyone is okay. I wanted to ask how we account for points paid with new home and the interest deduction limitation? For example, if a taxpayer buys a main home with 1MM in debt in 2018, and pays 10k in points. Do they get around 7.5k as the deduction since the 750k mortgage debt limitation? Thank you in advance.
 

#2
lucyko  
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Points paid for a new home purchase is a separate determination and has nothing to do with the mortgage debt limitation .As long as you meet all 9 tests related to points as shown on page 171 Of Pub 17 you can fully deduct the points paid in 2018 .
 

#3
dave829  
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lucyko wrote:Points paid for a new home purchase is a separate determination and has nothing to do with the mortgage debt limitation

That's not what I've found. Once the points are determined to be interest, they must be points paid on acquisition indebtedness to be deductible, i.e., you go from 461(g) to 163(h)(3). See Rev. Proc. 87-15; Griggs, TC Memo. 2013-2; Davis, TC Memo. 2006-272.

461(g) tells you when the points are deductible --- either (1) spread out over the term of the loan or (2) deductible if paid in connection with the purchase of a personal residence. That doesn't override the limitation of qualified residence interest on acquisition debt in 163(h)(3)(F), which tells you how much is deductible.

As a result, I think you’re going to find that only the points paid that are allocable to $750,000 of the mortgage loan are deductible.
 

#4
lucyko  
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I stand corrected .The support for your position is on page 4 of the "instructions for form 1098" for tax year 2019.

As an exception to reporting the total points paid, it states " to acquire a principal residence to the extent the points are allocable to an amount of principal in excess of $750,000". So it appears the financial institution handling the loan bears the burden of reporting the correct allocable points on form 1098 .
 

#5
Nilodop  
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Maybe so, but the taxpayer bears the burden of correctly reporting it.
 

#6
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Points are limited, I thought.

Is this still our position?

Client is arguing.

Drake software, in the mortgage limit worksheet input screen says, "do NOT include points in this line" - making me doubt myself.

EDIT: Pub 336, however, seems to want to include it in the worksheet separately, but still to calculate and thus limit it.

I can't think of a scenario in which the calculation would come out differently, however. Does anyone know why it must be calculated separately?
 

#7
KoiCPA  
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You have to watch out for descriptions on Drake entry lines. They often include a version of the wording on forms and instructions from the IRS, but not always the complete wording. The programmers often make good choices about how to simplify the directions, but they're not a replacement for the original form/instructions. (I'm always tripped up by form 8606 and 8824 in particular. Drake's line descriptions are shortened in ways that cause me to put values in the wrong places if I rely on the data entry screen. The original form descriptions are much clearer about what goes where.)

It is my opinion that points are pro-rated using the same percentage, like the Publication says. I don't know if there's a situation where it really matters to the bottom line, but mortgage interest goes on either line 8a or 8b, and points go on either 8a or 8c depending on the situation. Building a worksheet that clarifies what goes where is perhaps more steps than the IRS wanted to add to it. None of these lines affect the final Sch A deduction, though.
 

#8
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KoiCPA wrote:They often include a version of the wording on forms and instructions from the IRS, but not always the complete wording.


Agreed.

A pet peeve of mine is on the 1120s Schedule L. Drake's input screen says "payables less than one year".

But the line is "mortgage, notes, bonds" payable in less than one year".

Now the difference seems obvious and simple, but I threw some things in there as a noob years ago and a lender didn't like it (I don't blame them).
 


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