| Personal Residence / Seller-paid points |  |
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Points—up-front fees charged by a
mortgage lender, expressed as a percentage of the loan principal—are
normally the buyer's obligation. But sellers will sometimes sweeten a
deal by agreeing to pay the points on the buyer's mortgage loan. In most cases, points the buyer pays
are a deductible interest expense. And IRS says that seller-paid points
are also deductible. Suppose, for example, that you
bought a home for $600,000. In connection with a $500,000 mortgage loan,
your bank charged two points, or $10,000. The seller agreed to pay the
points in order to close the sale. You can deduct the $10,000 in the
year of sale. The only disadvantage is that your tax basis is reduced to
$590,000, which will mean more gain if and when you sell the home for
more than that amount. But that may not happen until many years later,
and the gain may not be taxable anyway. You may qualify for an exclusion
for up to $250,000 ($500,000 for a husband and wife who file jointly) of
gain on the sale of a principal residence. Or, if you die owning the
home, its basis becomes its then fair market value and the gain is
eliminated. There are some important limitations
on the rule allowing a deduction for seller-paid points. The rule
doesn't apply: . . . to points that are allocated
to the part of a mortgage above $1 million; . . . to points on a loan used to
improve (rather than buy) a home; . . . to points on a loan used to
buy a vacation or second home, investment property, or business
property; and . . . to points paid on a refinancing, home equity loan, or line of credit. |
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