15.14 Prepaid Interest
If you prepay interest on a loan used for investment or business purposes you may not deduct interest allocable to any period falling in a later taxable year. The prepaid interest must be deducted over the period of the loan, whether you are a cash-basis or accrual-basis taxpayer.
Points paid on the purchase of a principal residence are generally fully deductible in the year paid (15.8). Points paid on refinancing generally are not deductible (15.7).
Planning Reminder
With the exception of deductible points (15.8), prepayments of mortgage interest are not deductible; interest must be spread to the years to which it applies. You can only deduct the interest that qualifies as home mortgage interest (15.1) for that particular year.
Treatment of interest included in a level payment schedule.
Where payments of principal and interest are equal, a large amount of interest allocated to the payments made in early years of a loan will generally not be considered prepaid interest. However, if the loan calls for a variable interest rate, the IRS may treat interest payments as consisting partly of ...
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