Points When Mortgage Debt Over 1 Mil

[Kram BergGold]

My client is moving and buying a new home while retaining the old home. Totla mortgage debt will be 1,025,000. If he pays points will their deductibility be affected?

[Snaggletooth]

Try This

I'm going to take a wild stab at this without the benefit of research. I believe the $1MM limit applies to the totality of deductible mortgage interest. This would include interest and points.

Alternatively, points may be amortized over the course of the loan. Keep track of the points, and as soon as the loan balance dips below $1MM, then use the amortization of the points to the extent the total deduction remains under the amount applied to $1MM.
Amortized amounts in early years that are unused are lost.

[Golden Rocket]

Ignorance is Bliss

This $1MM cap is another situation where the less you know, the bigger the client's refund.

The 1098 only shows the amount of interest paid. The instructions that come with it tell the taxpayer "the amount of deductible interest may be limited. Consult your tax professional for advice."

So in walks the client, and we look at the 1098 and suspect from the sheer size of the interest that there may be a problem with the cap. So it has to be researched. Even if we have all the facts, dragging out the calculations extends the appointment by a half hour or so. We actually charge by the difficulty of the return, so client pays us more for the privelege of hearing that he won't be able to deduct all his interest.

Next year client goes to another preparer - a first-year preparer working under someone else's registration. Preparer looks at the 1098 and proceeds to enter this amount onto client's Schedule A. Client gets a bigger interest deduction, and a lower prep fee.

Ignorance is Bliss.

[New York Enrolled Agent]

I'm going to take a wild stab at this without the benefit of research. I believe the $1MM limit applies to the totality of deductible mortgage interest. This would include interest and points.

Alternatively, points may be amortized over the course of the loan. Keep track of the points, and as soon as the loan balance dips below $1MM, then use the amortization of the points to the extent the total deduction remains under the amount applied to $1MM.
Amortized amounts in early years that are unused are lost.

I agree with your first point. The points (prepaid interest) and the other mortgage interest need to be considered in total.

However, I think CCA 200940030 permits deductibility for a total mortgage debt of $1.1 million to be considered on the new home. The IRS memorandum combines the $1 million acquistion debt limt and the $100,000 equity debt limit.