Magazine article The CPA Journal

Mortgage Points: Recent IRS Pronouncements

Magazine article The CPA Journal

Mortgage Points: Recent IRS Pronouncements

Article excerpt

IRS recently issued proposed regulations setting forth reporting requirements under IRC Sec. 6050H for recipients of points paid on residential mortgages. The proposed regulations focus on taxpayers such as banks and other financial institutions that in the course a trade or business, receive $600 or more of interest (including points) in a calendar year on a residential mortgage loan.

The guidance provided to recipients of points under the propose regulations is also instructive to those taxpayers who points. The proposed regulations pay points. The proposed regulations build upon the administrate safe harbor provisions of Rev. Procs. 92-12 and 92-12A. Prior to these pronouncements, much uncertainty existed under IRC Secs. 461(g)(2) and 163(h)(3) regarding the timing of the deduction for points. Together, the pronouncements provide added relief to cash-basis taxpayers attempting to immediately deduct points paid on loans secured by a principal residence.

REV. PROCS. 92-12 AND 92-12A

As a matter of administrative practice, Rev. Proc. 92-12 allows a current deduction for points paid for tax years after 1990 where such payments are--

1. clearly identified as points on the settlement statement used at the closing. These payments may be described as "points." "loan origination fees," "loan discounts," or "discount points;"

2. computed based upon a percentage of the stated principal amount of the loan;

3. made in accordance with established business practices for charging loan points n acquiring a principal residence in the area in which the residence is located; 4. used to acquire the taxpayer's principal residence where the loan is secured by such residence; and

5. the payments must be paid directly by the taxpayer.

Rev. Proc. 92-12 does not apply to points allocated to 1) loan principal amounts in excess of the aggregate amount that may be treated as acquisition indebtedness, 2) home improvement loans, 3)loans on a second home, 4) refinancing loans, 5) home equity loans, or 6) line of credit loans.

In determining whether the "direct payment" requirement has been satisfied, an amount is so paid if the taxpayer provides an amount that equals or exceeds the amount required to be applied as points at the closing. Thus, where the taxpayer provides down payments, escrow deposits, or other earnest money, such amounts may be used to satisfy the direct payment requirement.

Rev. Proc. 92-12A clarifies several aspects of Rev. Proc. 92-12 in allowing "loan origination fees" on VA and FHA loans to qualify for an immediate deduction where the other requirements of Rev. …

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