Are seller-paid points deductible?

The IRS recently (1991) took a decision that basically allows homebuyers to deduct points paid by the seller for the buyers loan. This decision clarifies the positions of the seller, with respect to financing a buyer’s loan.

Homebuyers have always been able to deduct points they paid to get a loan, as have sellers always been able to deduct points they pay as an expense of the sale. What the 1991 ruling affects are buyers who had points paid, fully or partially, by the sellers. To qualify for the paid points deduction four criteria must be met: The points were paid in 1991 or later; the loan must be used to purchase a main home (not a mountain cabin); the points must meet the usual requirements to be deductible; buyers must have paid into the closing at least as much cash as the amount of the points.

Those buyers whose loans meet the requirements set out by the IRS can then file amendments to their taxes, federal and state, for the year of the purchase of the property and, by doing so, claim a refund.

The result for buyers who take a deduction (for seller paid points) is that they must reduce their "basis" of their home. For example a buyer who deducts $2,000 of seller paid points will have a $2,000 lower cost when they sell the home and in turn show a $2,000 higher profit on the home. Because of this many home sellers roll over their profit into their next home, carrying it onward many years before facing any tax bill.

To discuss this topic Click Here to go to our Online Forum