Amortization of home mortgage points.

• Author: Josephs, Stuart R.

Sec. 461(g)(1) requires a cash-method taxpayer to capitalize and amortize prepaid interest. However, Sec. 461 (g)(2) provides that this does not apply to points paid on debt incurred to purchase or improve the taxpayer's principal residence (if specified conditions are met). The General Explanation of the Tax Reform Act of 1976, p. 102, explains this legislation, in part, as follows:

The Act permits points paid by a cash method taxpayer on an indebtedness incurred in connection with the purchase or improvement of (and secured by) his principal residence to be treated as paid in the taxable year of actual payment. (Emphasis added.)

In Letter Ruling 9905033, a husband and wife, cash-method taxpayers, acquired a principal residence and obtained a mortgage to finance it late in Year 1. The taxpayers paid 1.25 points to the mortgage lender. Their Year 1 itemized deductions, including these points, were less than their Year 1 standard deduction. Accordingly, the taxpayers wanted to claim the standard deduction for Year 1 and amortize the points over the loan's life beginning in Year 2.

The IRS found that Sec. 461(g)'s legislative history indicated congressional...