When are points typically deductible as interest?

Points, which are prepaid interest on a loan, are typically deductible as interest when they are paid at closing. This means that if a borrower pays points upfront as part of the mortgage agreement, they can deduct those points from their income taxes in the year they are paid, assuming certain conditions are met.

This deduction is relevant primarily for home mortgage loans, where points can lower the overall interest rate of the loan. By paying points at closing, the borrower is effectively allowing the lender to earn upfront interest in exchange for a lower interest rate over time. The IRS provides provisions for deducting these points as interest, provided that they are associated with the purchase of a principal residence.

The other options do not align with the IRS regulations regarding point deductions. In particular, points filed as a separate expense or tied to the sale of property do not allow for immediate deduction in the same way as points paid at closing, and waiting until the loan is paid off does not alter the fundamental timing of the deduction opportunity. Thus, "when they are paid at closing" correctly identifies the timing of when points can be deducted as interest on a tax return.