Taxpayers purchased primary residence in 2007, paid 1% mortgage points on a VA loan, were issued a 20% Mortgage Credit Certificate. Points would qualify for full deduction in 2007 but taxpayers don't have sufficient expenses to itemize. Since IRS defines points as prepaid interest, can the 20% credit be taken on the points amount shown in item 2 of 1098? I've found differing opinions on this on other forums, but I can't find specific guidance in IRS pubs and tax topics.
Mortgage Credit on Points
Feb 04, 2008
4 Replies
They can elect to amortize the points over the term of the loan.
I believe, technically, that amortizing is the default.
If they meet nine tests, which are almost always met, they can Elect to take the full deduction in certain situations.
Yes, this is the case. They meet the tests to take the Schedule A deduction of points in the first year, but don't have enough other deductions to itemize. Several IRS Pubs define points as "prepaid interest," which is the basis for the Schedule A deduction of points. My question is, if points are in fact considered interest, can the MCC credit, which is computed at 20% of interest paid, be taken not only on the 1098 Item 1 interest amount, but also on the 1098 Item 2 points amount?
Here is an answer from IRS Email Tax Law Assistance:
"This issue is covered in Internal Revenue Regulations
1.25-2T(c) If these were points that were used to buy down the interest rate, and not for other fees, they would constitute prepaid interest, and the certified indebtedness amount includes any and all interest. If the interest were higher, you would have been able to take that interest. So when you pay up front points which are not for other fees, that interest is includable for MCC purposes."Join the Discussion
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