Oregon Tax Consultants Practice Exam

How are real estate points treated for tax purposes?

1. They are added to basis

2. They are deducted over the term of the loan

3. They are fully deducted in the year incurred

4. They are never deductible

The correct answer is: They are deducted over the term of the loan

The treatment of real estate points for tax purposes involves understanding how points, which are essentially prepaid interest on a mortgage, affect the taxation of the loan. When points are paid for a mortgage, they serve to reduce the interest rate on the loan. In the context of tax deductions, points can typically be deducted as interest. However, the proper method of deduction can depend on specific circumstances such as the type of loan and whether the taxpayer meets certain conditions. In many cases, points paid on a loan for purchasing a primary residence are indeed fully deductible in the year incurred, aligning with the nature of "points" as they are directly related to obtaining the mortgage. However, if the points are not fully deductible in the year incurred because they relate to a refinance or other specific situations, they can be deducted over the term of the loan. This means that rather than being fully deducted in the year they are paid, they can be amortized and deducted over the life of the mortgage, which aligns with the chosen answer. The option suggesting they are added to the basis is generally incorrect since points represent interest paid rather than a capital improvement or asset investment. The choice indicating they are fully deductible in the year incurred can apply but doesn't account for all scenarios