Publication 530 - Tax Information For First-Time Homeowners

ground rent. A ground rent is an obligation you

if you pay interest in advance, see Prepaid inter-

year, if any, when you do itemize your deduc-

est, earlier, and Points, next.

tions.

assume to pay a fixed amount per year on the

property. Under this arrangement, you are leas-

Home improvement loan. You can also

ing (rather than buying) the land on which your

fully deduct in the year paid points paid on a loan

Points

home is located.

to improve your main home, if tests (1) through

(6) are met.

Redeemable ground rents. If you make

The term points is used to describe certain

annual or periodic rental payments on a re-

charges paid, or treated as paid, by a borrower

Points not fully deductible in year paid.

deemable ground rent, you can deduct the pay-

to obtain a home mortgage. Points also may be

you do not qualify under the exception to deduct

ments as mortgage interest. The ground rent is a

called loan origination fees, maximum loan

the full amount of points in the year paid (or

redeemable ground rent only if all of the follow-

charges, loan discount, or discount points.

choose not to do so), see Points in chapter 5 of

ing are true.

A borrower is treated as paying any points

Publication 535, Business Expenses, for the

that a home seller pays for the borrower’s mort-

•

rules on when and how much you can deduct.

Your lease, including renewal periods, is

gage. See Points paid by the seller, later.

for more than 15 years.

Figure A. You can use Figure A as a quick

•

General rule. You cannot deduct the full

guide to see whether your points are fully de-

You can freely assign the lease.

amount of points in the year paid. They are

ductible in the year paid.

•

You have a present or future right (under

prepaid interest, so you generally must deduct

state or local law) to end the lease and

Amounts charged for services. Amounts

them over the life (term) of the mortgage.

buy the lessor’s entire interest in the land

charged by the lender for specific services con-

Exception. You fully can deduct points in

by paying a specified amount.

nected to the loan are not interest. Examples of

the year paid if you meet all the following tests.

•

these charges are:

The lessor’s interest in the land is primarily

•

1) Your loan is secured by your main home.

a security interest to protect the rental

Appraisal fees,

(Generally, your main home is the one you

payments to which he or she is entitled.

•

Notary fees,

live in most of the time.)

•

Payments made to end the lease and buy the

Preparation costs for the mortgage note or

2) Paying points is an established business

lessor’s entire interest in the land are not re-

deed of trust,

practice in the area where the loan was

deemable ground rents. You cannot deduct

•

made.

Mortgage insurance premiums, and

them.

•

3) The points paid were not more than the

VA funding fees.

Nonredeemable ground rents. Payments

points generally charged in that area.

on a nonredeemable ground rent are not mort-

You cannot deduct these amounts as points

4) You use the cash method of accounting.

gage interest. You can deduct them as rent only

either in the year paid or over the life of the

This means you report income in the year

mortgage. For information about the tax treat-

if they are a business expense or if they are for

you receive it and deduct expenses in the

ment of these amounts and other settlement

rental property.

year you pay them. Most individuals use

fees and closing costs, see Basis, later.

this method.

Cooperative apartment. You can usually

Points paid by the seller. The term points

treat the interest on a loan you took out to buy

5) The points were not paid in place of

includes loan placement fees that the seller

stock in a cooperative housing corporation as

amounts that ordinarily are stated sepa-

pays to the lender to arrange financing for the

home mortgage interest if you own a coopera-

rately on the settlement statement, such

buyer.

tive apartment and the cooperative housing cor-

as appraisal fees, inspection fees, title

poration meets the conditions described earlier

fees, attorney fees, and property taxes.

Treatment by seller. The seller cannot de-

under Special Rules for Cooperatives. In addi-

duct these fees as interest; but, they are a sell-

6) The funds you provided at or before clos-

tion, you can treat as home mortgage interest

ing expense that reduces the seller’s amount

ing, plus any points the seller paid, were at

your share of the corporation’s deductible mort-

realized. See Publication 523 for more informa-

least as much as the points charged. The

gage interest. Figure your share of mortgage

tion.

funds you provided do not have to have

interest the same way that is shown for figuring

been applied to the points. They can in-

Treatment by buyer. The buyer treats

your share of real estate taxes in the Example

clude a down payment, an escrow deposit,

seller-paid points as if he or she had paid them.

under Division of real estate taxes. For more

earnest money, and other funds you paid

If all the tests under Exception (discussed ear-

information on cooperatives, see Special Rule

at or before closing for any purpose. You

lier) are met, the buyer can deduct the points in

for Tenant-Stockholders in Cooperative Hous-

cannot have borrowed these funds from

the year paid. If any of those tests is not met, the

ing Corporations in Publication 936.

your lender or mortgage broker.

buyer must deduct the points over the life of the

Refund of cooperative’s mortgage inter-

loan.

7) You use your loan to buy or build your

est. You must reduce your mortgage interest

The buyer must also reduce the basis of the

main home.

deduction by your share of any cash portion of a

home by the amount of the seller-paid points.

patronage dividend that the cooperative re-

8) The points were computed as a percent-

For more information about the basis of your

ceives. The patronage dividend is a partial re-

age of the principal amount of the mort-

home, see Basis, later.

fund to the cooperative housing corporation of

gage.

mortgage interest it paid in a prior year.

Funds provided are less than points. If you

9) The amount is clearly shown on the settle-

If you receive a Form 1098 from the coopera-

meet all the tests under Exception (discussed

ment statement (such as the Uniform Set-

tive housing corporation, the form should show

earlier) except that the funds you provided were

tlement Statement, Form HUD-1) as points

only the amount you can deduct.

less than the points charged to you (test 6), you

charged for the mortgage. The points may

can deduct the points in the year paid up to the

be shown as paid from either your funds or

amount of funds you provided. In addition, you

the seller’s.

Mortgage Interest

can deduct any points paid by the seller.

Paid at Settlement

Note. If you meet all of the tests listed above

Example 1. When you took out a $100,000

One item that normally appears on a settlement

and you itemize your deductions in the year you

mortgage loan to buy your home in December,

or closing statement is home mortgage interest.

get the loan, you can either deduct the full

you were charged one point ($1,000). You meet

You can deduct the interest that you pay at

amount of points in the year paid or deduct them

all the tests for deducting points in the year paid

settlement if you itemize your deductions on

over the life of the loan, beginning in the year

(see Exception), except the only funds you pro-

Schedule A (Form 1040). This amount should

you get the loan. If you do not itemize your

vided were a $750 down payment. Of the $1,000

be included in the mortgage interest statement

deductions in the year you get the loan, you can

you were charged for points, you can deduct

provided by your lender. See the discussion

spread the points over the life of the loan and

$750 in the year paid. You spread the remaining

under Mortgage Interest Statement, later. Also,

deduct the appropriate amount in each future

$250 over the life of the mortgage.

Page 4

Publication 530 - Tax Information For First-Time Homeowners - 2002 Page 4

Related Articles

Related forms

Related Categories