Thousands of homeowners who refinance their mortgages this year will not be able to claim tax deductions on next year's taxes for the full amount of points paid to get the loans, the Internal Revenue Service has ruled.
The IRS reiterated a ruling that points or other loan-origination fees in refinancings must be deducted over the life of the loan, not in the first year in which the loan was received. Deductions can be taken in the first year when the points are paid in connection with the purchase of another principal residence or for home improvements.
A point is a charge amounting to 1 percent of the loan that is paid to the lender when the loan is made. Most lenders in the Washington area are charging two to four points on mortgages and refinancings.
"People were under the impression that these points were like other points," said Ellen Murphy of the IRS. The tax collectors say there is a difference between points charged on new mortgages and on refinancings.
Murphy said the announcement was made this week after many taxpayers called IRS offices around the country asking whether they could deduct the points. The IRS ruling is retroactive, Murphy said.
Some lenders said they don't expect the ruling to affect the brisk refinancing business. The Mortgage Bankers Association of America estimated that between 45 and 50 percent of its members' business is now in refinancings compared with 15 percent a year ago.
"People are still going to refinance probably at the same rate they are now," said Scott McCleary, consumer affairs coordinator of the mortgage bankers. McCleary said no figures are available on how many refinancings have taken place so far this year.
"I think people refinance to get the lower interest rate," McCleary said. "I think, in the long run, people will always refinance to lower their monthly payments."
Many people refinancing their homes and some of their advisers apparently thought that they could deduct the full value of points paid at settlement during one year, Murphy said. Instead, the taxpayers can deduct a portion of the points every year until the loan is paid off. It would work this way:
A person who pays $3,600 in points to refinance a 30-year mortgage -- which would mean 360 monthly payments -- would divide the points by the number of monthly payments. In this case, that would mean a tax deduction of $10 a month over the life of the loan. If the taxpayer settled the loan in May and had seven payments to make this year, he or she could deduct $70 on 1986 taxes, Murphy said.
However, the taxpayer can deduct up front the portion of points paid for home improvements. If $20,000 of a $80,000 loan went for a new addition, one-fourth of the points could be deducted in the first year and the remainder written off over the life of the loan.