Are Mortgage Points Deductible? Rules for Your Home, Rental, and Vacation Property
The tax treatment of mortgage points depends on property type and loan purpose. Contact me before closing or refinancing to ensure your deductions are properly calculated and compliant with IRS standards.
Understanding Mortgage Points
Mortgage points—sometimes called discount points—are fees paid to a lender at closing to obtain a lower interest rate. Each point equals 1% of the loan principal.
Points can represent either:
Prepaid interest, which may be deductible, or
Origination or service fees, which are not deductible.
The tax treatment depends on how the property is used and the purpose of the loan.
Authority: IRS Topic No. 504 – Home Mortgage Points; IRS Publication 936 – Home Mortgage Interest Deduction
Points Paid on a Main Home
Points paid on a loan to buy, build, or substantially improve your main home are generally deductible in full in the year paid if all of the following conditions are met:
The loan is secured by your main home.
Paying points is an established business practice in your area.
The points were computed as a percentage of the loan principal.
The points were clearly shown as “points” on the settlement statement.
You used your own funds (not loan proceeds) to pay them at closing.
The amount is not a substitute for appraisal, title, or legal fees.
The funds were used to buy, build, or improve your main home.
You use the cash method of accounting (true for most individuals).
When these requirements are met, you may deduct the full amount in the year paid on Schedule A (Form 1040).
Example:
A taxpayer buys a $500,000 home and pays 2 points ($10,000) to reduce the mortgage rate. The entire $10,000 is deductible in 2025 if all Topic 504 criteria are satisfied.
Refinancing Your Main Home
When refinancing, points are not immediately deductible. They must be amortized over the loan term as additional mortgage interest.
If part of the loan proceeds is used to improve your main home, the points related to that portion may be deducted in the year paid, with the balance amortized.
Example:
$4,000 in points on a 20-year refinance = $200 deductible per year ($4,000 ÷ 20).
Authority: IRS Publication 936; Treas. Reg. §1.461-1(a)(1).
Points Paid on a Rental Property
For a rental property, the IRS requires capitalization of points as a debt issuance cost. They are not deductible in full in the year paid.
Instead, you must amortize them over the life of the loan and deduct annually as a rental expense on Schedule E.
Example:
A $3,000 point charge on a 30-year rental mortgage allows a $100 per-year deduction ($3,000 ÷ 30).
Authority: Treas. Reg. §1.446-5; IRS Publication 527 – Residential Rental Property
Points Paid on a Vacation Home
Points paid on a vacation home or second residence are not fully deductible in the year paid. They must be amortized over the loan’s life, similar to a rental property, unless the loan proceeds directly improve that property and all Topic 504 requirements are met.
Unlike a principal residence, second-home points do not automatically qualify for immediate deduction.
Example:
If you pay $8,000 in points for a 15-year vacation home mortgage, you generally deduct $533 per year ($8,000 ÷ 15).
Authority: IRS Publication 936; IRS Topic 504.
Points Paid by the Seller
If the seller pays points for you, the IRS treats them as if you paid them from your own funds. You may deduct them if the loan otherwise qualifies. However, your cost basis in the home must be reduced by the amount of seller-paid points.
Authority: Topic 504, Example 2.
Nondeductible Closing Costs
The following expenses are not deductible as mortgage interest:
Appraisal fees
Title insurance or attorney fees
Property taxes paid at closing (deductible separately)
Recording or transfer fees
These amounts become part of the cost basis of your property, not an immediate deduction.
Effect of the One Big Beautiful Bill Act (OBBBA)
The OBBBA, enacted in 2025, did not modify the tax treatment of mortgage points.
Publication 936 and Topic 504 remain unchanged.
OBBBA adjusted the SALT deduction limit, phase-outs for mortgage interest, and home equity loan rules, but not the deductibility framework for points.
Therefore, taxpayers should continue to follow existing IRS guidance under Topic 504 and Reg. §1.446-5 when claiming mortgage point deductions for 2025 and 2026.
