Regarding construction mortgages, we are trying to determine when the points should be reported on a 1098 to the borrower. Would it be the year they settle the original phase that starts the construction period during which they pay the points or would it be the year the construction period converts to the permanent mortgage?
A second question – is it correct that we do not report points for refinance mortgages?
Amounts paid on a loan to construct a residence (construction loan) or to refinance a loan incurred to construct a residence are reportable on Form 1098 as points if they:
• Are clearly designated on the loan documents as points incurred in connection with the loan, such as loan origination fees, loan discount, discount points, or points;
• Are computed as a percentage of the stated principal loan amount;
• Conform to an established business practice of charging points in the area where the loan is issued and do not exceed the amount generally charged in the area;
• Are paid in connection with a loan incurred by the payer of record to construct (or refinance construction of) a residence that is to be used, when completed, as the principal residence of the payer of record;
• Are paid directly by the payer of record; and
• Are not allocable to an amount of principal in excess of $750,000, or $1 million if you know that the written binding contract exception applies.
Generally points on a refinance are not reportable; however amounts paid to refinance a loan to construct a residence are not points to the extent they are allocable to debt that exceeds the debt incurred to construct the residence. It is not clear how you documented the conversion to permanent financing. Points are reported in the year the construction loan is originated and in the year the loan to refinance the construction loan is originated. The same is not true for a modification.