When you close on a first or second home, you usually pay points. In real estate speak, points can include both prepaid interest and various other closing costs. There's no tax deduction for the closing costs, but prepaid interest points are a write-off. You can claim them even if the seller paid them, but the rules for deducting them are more restrictive on a second home than a first.
You can claim points on only two houses, one of which is your primary home. Should you have a second home and buy a third, you can write off the points only if you stop deducting them on the second house. If you rent out the house, you have to live there at least 14 days a year or 10 percent of the time it's rented out -- whichever period is longer -- to take the mortgage interest deduction on Schedule A.
On a first home, you can write off your points in the year you pay them. With a second home, you have to deduct them over time. On a 20-year mortgage, for example, you can usually write off 5 percent of the points each year; on a 25-year mortgage it would be 4 percent. To take the deduction, the mortgage must be $250,000 or less. If the mortgage is bigger, you can only take a write-off for six points or less, and no more than four points if the mortgage lasts 15 years or less.
You can take the mortgage-interest deduction only if you itemize write-offs on Schedule A. If you choose the standard deduction instead, there's no mortgage write-off. You can deduct mortgage interest and points on your first and second home, and also any mortgage insurance premiums you pay. The mortgage lender should send you a copy of Form 1098, reporting your mortgage interest for the year. This may not include all the mortgage interest, so compare it with your own records.
If you rent out the house part of the year, you can claim some or all of the expenses as a deduction from rental income. Say you use the house for June and July and rent it out the other 10 months: You can write off five-sixths of the mortgage interest and ratable points as a rental expense. The remaining one-sixth goes on Schedule A as a personal deduction. If you don't itemize deductions, you can't claim it.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.