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As a general rule you can't deduct prepaid home mortgage interest ahead of the year to which it relates. The most common form of prepaid interest is "points."
A point is a charge paid by the borrower to the lender upon taking out the loan. One point equals one percent of the amount borrowed; thus, on a $100,000 loan, three points equals $3,000, but on a $250,000 loan, three points equals $7,500.
Under the general rule, you could deduct points as mortgage interest but you'd have to spread your deduction for points out over the entire life of the loan, even though you actually paid the amount in the first year.
Fortunately, there is an exception that allows many borrowers to deduct their points in the year paid.
You may deduct points in the year you pay them if all of the following are true:
The deduction for points applies only to buyers, and not to sellers, of homes. If the seller pays some points to enable the buyer to get a loan, the buyer may deduct the points. The seller treats the amount paid as a selling cost that helps to reduce his or her taxable profits on the sale.
Second homes. The rules above apply only to your main home. If you pay points on a loan secured by a second home, those points can only be deducted over the entire term of the loan.
Refinancing. Points paid in refinancing a mortgage on your main home are generally not deductible in the year paid. They must be prorated and deducted over the entire loan period.
However, if the proceeds of your refinancing are used both to pay off the old mortgage and to pay for home improvements, the portion of the points that pertain to the home improvements can be deducted in the first year. The remaining portion must be prorated over the loan's entire term.
Paying off your mortgage early. If your mortgage is paid off early (perhaps because you sell the home, refinance to get a lower interest rate, or make enough extra principal payments to retire the loan), at that time you can deduct any portion of points on the old loan that have not yet been deducted.