Points

• "Points" is a financing term that equates to a percentage of the loan amount. One point equals one percent of the loan. Points are charged as loan origination fees, and as discounts for FHA and VA loans. They are deductible if the property was purchased to be "owner-occupied," and not as investment rental real estate. Points are also deductible by the purchaser even though the seller paid them as part of a negotiated agreement. Points paid to finance a second home can only be deducted over the life of the loan, instead of all at once in the year of purchase as with a primary residence.
  
  

Prorated Property Taxes

• Prior to settlement, the seller may already have paid all of that year's property taxes. The buyer must therefore refund to the seller the amount of the tax for the period from settlement to the end of the year. That amount will be charged as a prorated property tax on the HUD-1 settlement sheet, which the buyer can deduct on that year's income tax return.
  
  

Pre-paid Home Mortgage Interest

• A settlement that is conducted on any day other than the first day of the month will result in a mortgage interest pre-payment amount. That amount represents the interest on the loan for the days starting at settlement to the end of the month. The interest pre-payment is tax deductible in the year of purchase, while the interest paid on the remainder of the loan is deductible over the life of the loan.
  
  

Sales Taxes

• State and local sales taxes can be deducted from the purchase of the home in the year that it is purchased.
  
  

Private Mortgage Insurance (PMI) and Mortgage Insurance Premiums (MIP)

• Private mortgage insurance that is carried on non-government loans, and mortgage insurance premiums for government FHA and VA loans are fully tax-deductible when the total household income does not exceed $100,000. Incomes above $100,000 but below $109,000 will be prorated accordingly. Households with incomes above $109,000 may not deduct PMI or MIP payments. Congress enacted this legislation for tax returns through 2010, after which it may be extended or amended.
  
  

First-Time Homebuyer's Credit

• At certain times and for specified periods only, Congress may offer first-time home buyers a formulated credit as an economic stimulus.
  
  

Warning

• Congress changes the tax code often, and may amend or discontinue sections that apply to real estate settlement fee deductions. Reputable tax professionals should be consulted for proper income tax preparations.