Prepaid interest, sometimes called points, is generally tax deductible when a person pays them in connection with buying, building or improving their principal residence. When points are paid on a refinance, they are not a current deduction but have to be taken pro rata over the life of the mortgage.
For instance, if $3,000 in points were paid on refinancing a 30-year mortgage, a deduction of $100 per year is allowed. When the loan is paid off or replaced by refinancing again or the home is sold and the mortgage paid off from the proceeds, the balance of any un-deducted points may be taken in that tax year. Your tax professional needs to be made aware of any of these situations so that he or she can accurately reflect the deductions in your return.
Currently, the most common situation is homeowners may be refinancing their home for the second, third or even, fourth time. If there are points that have not been completely deducted, they need to be treated in the year of refinancing. For more information, see points in IRS Publication 936; there is a section on Refinancing in this publication. For advice considering your specific situation, contact your tax professional. Need to find one? Click here for additional information.