Publication 530 - Tax Information For First-Time Homeowners

Prepaid interest. If you pay interest in ad-

patronage dividend that the cooperative re-

8. The points were computed as a percent-

vance for a period that goes beyond the end of

ceives. The patronage dividend is a partial re-

age of the principal amount of the mort-

the tax year, you must spread this interest over

gage.

fund to the cooperative housing corporation of

the tax years to which it applies. Generally, you

mortgage interest it paid in a prior year.

9. The amount is clearly shown on the settle-

can deduct in each year only the interest that

If you receive a Form 1098 from the coopera-

ment statement (such as the Uniform Set-

qualifies as home mortgage interest for that

tive housing corporation, the form should show

tlement Statement, Form HUD-1) as points

year. An exception applies to points, which are

only the amount you can deduct.

charged for the mortgage. The points may

discussed later.

be shown as paid from either your funds or

the seller’s.

Late payment charge on mortgage payment.

Mortgage Interest Paid

You can deduct as home mortgage interest a

at Settlement

late payment charge if it was not for a specific

Note. If you meet all of the tests listed above

service in connection with your mortgage loan.

and you itemize your deductions in the year you

One item that normally appears on a settlement

get the loan, you can either deduct the full

or closing statement is home mortgage interest.

Mortgage prepayment penalty. If you pay off

amount of points in the year paid or deduct them

You can deduct the interest that you pay at

your home mortgage early, you may have to pay

over the life of the loan, beginning in the year

settlement if you itemize your deductions on

a penalty. You can deduct that penalty as home

you get the loan. If you do not itemize your

Schedule A (Form 1040). This amount should

mortgage interest provided the penalty is not for

deductions in the year you get the loan, you can

be included in the mortgage interest statement

a specific service performed or cost incurred in

spread the points over the life of the loan and

provided by your lender. See the discussion

connection with your mortgage loan.

deduct the appropriate amount in each future

under Mortgage Interest Statement, later. Also,

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

if you pay interest in advance, see Prepaid inter-

Ground rent. In some states (such as Mary-

tions.

est, earlier, and Points, next.

land), you may buy your home subject to a

ground rent. A ground rent is an obligation you

Home improvement loan. You can also

assume to pay a fixed amount per year on the

fully deduct in the year paid points paid on a loan

Points

to improve your main home, if you meet the first

property. Under this arrangement, you are leas-

ing (rather than buying) the land on which your

six tests listed earlier.

The term “points” is used to describe certain

home is located.

Refinanced loan. If you use part of the refi-

charges paid, or treated as paid, by a borrower

Redeemable ground rents. If you make

nanced mortgage proceeds to improve your

to obtain a home mortgage. Points also may be

annual or periodic rental payments on a re-

main home and you meet the first six tests listed

called loan origination fees, maximum loan

deemable ground rent, you can deduct the pay-

earlier, you can fully deduct the part of the points

charges, loan discount, or discount points.

related to the improvement in the year you paid

ments as mortgage interest. The ground rent is a

A borrower is treated as paying any points

redeemable ground rent only if all of the follow-

them with your own funds. You can deduct the

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

ing are true.

rest of the points over the life of the loan.

gage. See Points paid by the seller, later.

•

Your lease, including renewal periods, is

Points not fully deductible in year paid.

for more than 15 years.

General rule. You cannot deduct the full

you do not qualify under the exception to deduct

amount of points in the year paid. They are

the full amount of points in the year paid (or

•

You can freely assign the lease.

prepaid interest, so you generally must deduct

choose not to do so), see Points in Publication

•

You have a present or future right (under

them over the life (term) of the mortgage.

936, Home Mortgage Interest Deduction, for the

state or local law) to end the lease and

rules on when and how much you can deduct.

Exception. You can deduct the full amount

buy the lessor’s entire interest in the land

of points in the year paid if you meet all the

Figure A. You can use Figure A as a quick

by paying a specified amount.

following tests.

guide to see whether your points are fully de-

•

The lessor’s interest in the land is primarily

ductible in the year paid.

1. Your loan is secured by your main home.

a security interest to protect the rental

(Generally, your main home is the one you

Amounts charged for services. Amounts

payments to which he or she is entitled.

live in most of the time.)

charged by the lender for specific services con-

nected to the loan are not interest. Examples of

Payments made to end the lease and buy the

2. Paying points is an established business

these charges are:

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

practice in the area where the loan was

deemable ground rents. You cannot deduct

•

made.

Appraisal fees,

them.

•

3. The points paid were not more than the

Notary fees, and

Nonredeemable ground rents. Payments

points generally charged in that area.

•

Preparation costs for the mortgage note or

on a nonredeemable ground rent are not mort-

4. You use the cash method of accounting.

deed of trust.

gage interest. You can deduct them as rent only

This means you report income in the year

if they are a business expense or if they are for

You cannot deduct these amounts as points

you receive it and deduct expenses in the

rental property.

either in the year paid or over the life of the

year you pay them. Most individuals use

mortgage. For information about the tax treat-

this method.

Cooperative apartment. You can usually

ment of these amounts and other settlement

treat the interest on a loan you took out to buy

5. The points were not paid in place of

fees. and closing costs, see Basis, later.

stock in a cooperative housing corporation as

amounts that ordinarily are stated sepa-

home mortgage interest if you own a coopera-

rately on the settlement statement, such as

Points paid by the seller. The term “points”

tive apartment and the cooperative housing cor-

appraisal fees, inspection fees, title fees,

includes loan placement fees that the seller

poration meets the conditions described earlier

attorney fees, and property taxes.

pays to the lender to arrange financing for the

under Special Rules for Cooperatives. In addi-

buyer.

6. The funds you provided at or before clos-

tion, you can treat as home mortgage interest

ing, plus any points the seller paid, were at

Treatment by seller. The seller cannot de-

your share of the corporation’s deductible mort-

least as much as the points charged. The

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

gage interest. Figure your share of mortgage

funds you provided do not have to have

ing expense that reduces the seller’s amount

interest the same way that is shown for figuring

been applied to the points. They can in-

realized. See Publication 523 for more informa-

your share of real estate taxes in the Example

clude a down payment, an escrow deposit,

under Division of real estate taxes, earlier. For

tion.

earnest money, and other funds you paid

more information on cooperatives, see Special

Treatment by buyer. The buyer treats

at or before closing for any purpose. You

Rule for Tenant-Stockholders in Cooperative

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

cannot have borrowed these funds from

Housing Corporations in Publication 936.

If all the tests listed earlier under Exception are

your lender or mortgage broker.

Refund of cooperative’s mortgage inter-

met, the buyer can deduct the points in the year

7. You use your loan to buy or build your

est. You must reduce your mortgage interest

paid. If any of those tests are not met, the buyer

deduction by your share of any cash portion of a

main home.

must deduct the points over the life of the loan.

Page 4

Publication 530 (2007)

Publication 530 - Tax Information For First-Time Homeowners - 2007 Page 4

Related Articles

Related forms

Related Categories