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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.
 


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