|
Seller-Paid Points
You've asked
whether you can deduct mortgage points paid on your behalf by the
seller of the home you just bought. Yes, you can, subject to some
important limitations described below.
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. But until
a few years ago, IRS had refused to allow buyers to claim an interest
deduction for points that the seller paid.
But IRS reversed
itself, and now says that seller-paid points are 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.
Under the
old rule, you couldn't deduct the $10,000. And, your tax basis
in the home was $600,000. That's the figure used to compute gain
or loss when you sell the home.
Under the
present rule, you 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 the
exclusion for gain on the sale of a principal residence. Or, if
you die owning the home, its basis becomes its 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.
Be sure to
consult with a tax advisor for proper planning and implementation
of tax saving ideas to be sure they are right for you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
Site
Design Provided By:
|
