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January 21, 2003; Revised October 13, 2003 Long
Island, New York.
The tax code treats points paid in cash differently on
purchase and refinance transactions.
On a purchase transaction, points paid in cash are
fully deductible in the year the loan is closed. On a
refinance, points paid in cash are deductible but the
deduction must be spread evenly over the term. If the
points were $3600 and the term was 30 years, for
example, the deduction is just $10 a month! However,
if you pay off the loan early, all unused deductions can
be taken in the year of payoff. If the loan cited above
is paid off after 5 years, for example, a deduction of
$3,000 could be taken in year 6.
Points that are financed, meaning that they are included
in the loan, are treated in the same way on purchases
and refinances. In neither case are they deductible as
points. The loan amount will be higher, and therefore
interest deductions will be greater, but these
deductions are spread over the life of the loan. If the
loan is repaid early, much of the deduction derived from
the points is lost.
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