Deductibility of Points--Refinancing of Personal Residence

In general, in order to deduct points paid in connection with a residential mortgage, the points must be "qualified residence interest." In addition, even where points are deductible, certain other requirements, as discussed below, must be satisfied in order to deduct them in the year they are paid (as opposed to being written off over the term of the mortgage).

In order for interest (including points) paid in connection with a refinancing mortgage to be "qualified residence interest," the mortgage must be with respect to, and secured by, either your principal residence or one second residence which you select. In addition, the mortgage proceeds must either be used to make substantial improvements to the home, or must not exceed the principal amount of your old mortgage by more than $100,000 ($50,000 if you are married and file a separate return).

Even where "points" paid on a refinancing are "qualified residence interest," they will only be deductible in the year paid

• (1) if they relate to your principal residence (not a second residence);

• (2) to the extent that they are consistent with local business practice on this type of loan; and

• (3) to the extent they relate to the portion of the mortgage which is used to finance improvements to the home. In other words, points attributable to the portion of the new mortgage which is used to repay the old mortgage cannot be deducted when paid, but may be deducted over the life of the new mortgage (or when it is prepaid). Similarly, to the extent the proceeds of the new mortgage exceed the principal amount of the old mortgage and are used for purposes other than improving the property, no current deduction is permitted; however, the points may be deducted over the term of the new loan to the extent the excess principal amount does not exceed $100,000.