When buying a home you may be given the opportunity to prepay some interest in the form of “points.” This allows the buyer to bring down their mortgage interest rate by making upfront payments. Points can also be paid for building a home or for improving your principal residence. However, points paid when you refinance cannot be taken as a current tax deduction but they can be taken prorate during the life of our mortgage.
For example, if you are refinancing a 30 year mortgage and you pay $3K in points upfront, you are allowed to deduct $100 per tax year. Any time the loan becomes paid in full, due to either sale or refinance, the year the transaction happens is the year you can deduct the balance of the un-deducted points.
Since I am not a tax professional, I advise homeowners with Fairfax homes for sale to seek the advice of an accountant or tax professional to make sure you are taking the best advantage of your situation. The most recent situations have been homeowners refinancing their home several times. Again, un-deducted points could be deducted in the tax year in which the refinance happens.
For the do-it-yourself tax preparers, the IRS has a Publication 936 with a section on Points (page 5) that you can reference. They have a nice yes/no chart that will help you determine if you can deduct your points and when.