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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 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 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 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 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.

* A refinancing 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 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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Title Annotation:tax deduction of home mortgage loan points
Publication:Journal of Accountancy
Date:Sep 1, 1992
Previous Article:Loan impairment subject of FASB proposal.
Next Article:S corporation distribution regulations.

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