When buying and selling real estate, keep in mind the rules for deducting certain expenses. Homebuyers face two major fees: closing costs and points. Closing costs are generally not deductible, but they add to the cost basis of the home, reducing the gain when the house is sold.
Points, on the other hand, may be fully deducted in the year they are paid as long as the following conditions are met: (1) the loan is for purchase or improvement of the primary home, (2) the loan is secured by your home, and (3) the points are for the use of money (not a service charge).
If the purpose of a loan is not to acquire or improve your principal residence, but the other two conditions are met, you may still deduct the points in monthly increments over the life of the loan. If the mortgage ends early because of prepayment or refinancing, you may deduct the remaining, or unamortized, points at that time.
When refinancing, points paid on a loan to improve the principal residence may be deducted immediately. If you are refinancing to improve your interest rate, the points are deductible over the life of the loan. Points paid by the seller are also deductible by the buyer.
