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Mortgage points may be currently deductible.

New safe harbor

To minimize possible disputes regarding the deductibility of points paid to acquire a principal residence, Rev. Proc. 92-12 allows "as a matter of administrative practice," a current deduction for cash method taxpayers, for tax years beginning after 1990, if the payments meet the following criteria.

* They must be clearly designated on the Uniform Settlement Statement (Form HUD-1 or equivalent) as points incurred in connection with the debt (e.g., "loan origination fees," "loan discount," "discount points" or "points").

* They must be computed as a percentage of the debt's stated principal amount.

* They must conform to an established business practice of charging points for loans to acquire personal residences in the area in which the residence is located. The points paid must not exceed the amount generally charged in that area. Amounts designated as points that are paid in lieu of amounts ordinarily stated separately on the settlement statement (such as appraisal fees, inspection fees, title fees, attorney fees property taxes and mortgage insurance premiums) are not deductible as points.

* They must be paid to acquire the taxpayer's principal residence and the loan must be secured by that residence.

* They must be paid directly by the taxpayer. This test is met if the taxpayer furnishes, from funds that have not been borrowed for this purpose as part of the overall transaction, an amount at least equal to the amount required to be applied as points at the closing. The amount furnished may include down payments, escrow deposits, earnest money applied at the closing and other funds paid at closing.

Points not covered

by safe harbor

* Points allocable to debt exceeding $1 million ($500,000 for a married individual filing separately).

* Points paid for loans to improve (as opposed to acquire) a principal residence.

* Points paid for loans to acquire or improve a nonprincipal residence, such as a second home or vacation, investment or business property.

* Points paid for refinancing loans, home equity loans or lines of credit, even if the debt is secured by a principal residence.
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Article Details
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Author:Blum, Richard A.
Publication:The Tax Adviser
Article Type:Brief Article
Date:May 1, 1992
Previous Article:Sale of mortgage loans with retained servicing rights.
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