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Seller-paid points: What are They and How Can Homeowners Deduct Them?

The National Association of Realtors’ (NAR) July 2022 report stated that existing home sales were down but prices were up nationwide, compared to last year.

NAR Chief Economist Lawrence Yun said that “The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June.” However, he added that “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”  (Note: on 9-15-2022 the average 30-year mortgage interest rate actually hit 6.24%).

If you are a recent new homeowner, you will want to consider the tax deductibility of mortgage points that the seller had paid on your behalf.

In general, these mortgage points purchased by the seller are deductible, however, there are some exceptions.

What are Points?

Points are fees that a mortgage lender will charge during closing and is usually a percentage of the loan principal. Points are typically the buyer’s responsibility to purchase, but sometimes, the home seller will agree to pay the points for the buyer’s mortgage.

If you itemize on your tax return, the points that the homebuyer purchased can be deducted. Likewise, seller-paid points could also be deducted.

Example: You purchased a home for $500,000

However, your mortgage after your down payment is $450,000 and you had the seller purchase two points for $9,000 (2% of your mortgage). During closing, the seller would pay the $9,000 in closing costs.

That $9,000 can be deducted in the same year of the home sale. However, this impacts your basis in the home. Now your tax basis for the home is $491,000. Basis is used in calculating the overall gain on the sale of your home. The home sale gain exclusion provides that you will not be taxed on the first $250,000 of home sale gain ($500,000 for married filed jointly) if you have owned the house for 2 years in the past 5 years and used it as a primary residence during that time.

Not so fast…not ALL Seller-Paid Points are deductible

Some of the non-deductible seller-paid points include:

  • The points that are being used for the part of a mortgage above $750,000 ($375,000 for married filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025);
  • The points that are from a loan used towards home improvements;
  • The points that are from a mortgage for a vacation or secondary residence, investment, or business property.
  • The points that were paid while refinancing a home equity loan or a line of credit.

 Please reach out to your Wegner CPA tax advisor with any questions regarding the deductibility of points on your home mortgage.

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