Source: Ludwig, Klewer & Co. PLLC

Mortgage points paid on the purchase of a main residence are fully deductible whether paid in cash or financed over the life of the loan, so long as the cash down payment at least equals the cost of the points.

Not all points are deductible up front. You can deduct those on a refinanced loan evenly over the term of the loan. Refinancing the loan for a second time triggers the deduction of the remaining balance of the points from the last refinancing. If you sell a residence while amortizing the points, any points not yet deducted are written off in full. If you use some of the refinancing proceeds to fix up your principal home, a portion of the points is deductible up front. State and local transfer taxes on a home purchase are not deductible but can be added to the tax basis and reduce the realized gain when you sell the house.

Pulling out cash in a home refinancing can create AMT problems, because if the mortgage balance increases when you’re refinancing a primary residence or a second home, interest on the excess portion is added back to income under the AMF (Exception: when the extra proceeds are used to improve a first or second home.)

A full deduction for interest on up to $1 million of property recorded Home Acquisition Debt (to buy, build, or substantially improve a main or second residence) remains a major tax shelter. (If the mortgage dates from before Oct. 13, 1987, all the interest is deductible.)

Interest on a Home Equity Loan up to $100,000 secured by a residence is fully deductible, with deductibility of amounts above that depending on the use of the proceeds. If you use your house as security on a loan from your 401(k) or 403(b) annuity, the interest is deductible as mortgage interest even if the total of loans exceeds $100,000 and you are a key executive. Since only home-acquisition debt is deductible under the AMT, high home-equity debt might trigger the AMT.

KEEP IN MIND        

• If you tapped IRAs for a failed first-home purchase you have 120 days to roll the money back to an IRA without tax or penalty – twice the time allowed for a standard IRA distribution. It’s treated as a rollover, and only one is allowed for each IRA per year.
• You can tap an IRA (penalty-free not tax-free) for up to $10,000 to buy a first home. You can tape a 401(k) only by borrowing from it.
• The property tax on your home depends on the valuation. Big swings in real estate prices may put valuations out of sync with actual prices.
• If your estate is worth more than $3.5 million you might shrink its value below the taxation threshold by encumbering your home with a “reverse mortgage”, trading equity for current income that is not taxable and doesn’t affect Social Security benefits. If the lender is your child, you get regular payments of cash (or a lump sum) while the child gets the tax benefit of depreciation on the real estate. But depreciated real estate will not fully quality for the lowest tax on gains.
• The tax code allows equity-sharing in which an investor (such as a parent) makes a down payment on a house while the resident (e.g., child) pays the mortgage, taxes and maintenance. The investor could get depreciation deductions, plus part ownership of a residence that may appreciate. The resident might get deductions for part of the mortgage interest and property taxes and eventual 100% ownership.
• The time limits associated with tax-free exchanges of real estate are strictly enforced.