Deducting points.The Internal Revenue Service and taxpayers have been engaged in a running battle over points--deductions for amounts paid in connection with loans secured by a principal residence. Revenue procedure 92-12 establlshes a safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. leaving no question on when a taxpayer may deduct points. The safe harbor lists four requirements: 1. The settlement statement prepared at the closing must identify clearly the point amounts paid in connection with the indebtedness. Designations such as "loan origination The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. fees," "loan discount," "discount points" or "points" are acceptable. Amounts called points that are really disguised payments for other amounts paid at closing (appraisal fees, inspection fees, title fees, attorney fees, property taxes or mortgage insurance premiums) are not deductible as points. 2. The amounts must be based on a percentage of the principal amount of the loan. 3. The amounts must conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the established business practice for charging points and must not exceed the amounts generally charged for points in the geographic location of the home. 4. The amounts must be paid directly by the taxpayer. The funds used to pay the points cannot be deducted by the bank from the loan proceeds. However, the down payment or escrow escrow Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. deposits can be used to pay points. Also described were loans on which points are not deductible: * The principal portion of the loan in excess of $1 mfllion. * Loans used to improve (rather than acquire) a principal residence. * Loan proceeds used to purchase or improve a second home or vacation property Vacation property is a niche in the real estate market dealing with residences used for holiday vacations (eg. beach house). The rapid development of the Internet and technologies such as telephony and personal digital assistants that allow people to work from home since circa 1995 . * A refinancing Refinancing An extension and/or increase in amount of existing debt. loan, equity loan or line of credit, even though secured by a principal residence. Observation: Since points cannot be paid from loan proceeds, taxpayers should document the source of funds used for paying points. (If cash paid at the closing exceeds the amount of the points, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. will not treat loan proceeds as the source of payment for the points.) Although the tax code allows a current deduction for points paid on loans to improve a principal residence, the IRS clearly intends to limit the safe harbor to acquisition loans. However, until the IRS provides further guidance, taxpayers still should consider deducting points paid on loans to improve a principal residence since the tax code permits a current deduction for interest on such loans. |
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