Points Paid by Seller

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Under Rev. Proc. 94-27, individual taxpayers may claim a tax deduction for points paid by the seller in connection with the purchase of a principal residence if certain requirements are met. Under this rule, the seller is treated as having paid the amount of the points to the buyer who, in turn, is treated as having used that cash to pay the points charged by the lender. The amount of the seller-paid points is subtracted from the purchase price in computing the basis of the residence.

In order for the seller-paid points to be deductible by the buyer in the year paid, all of the following requirements must be satisfied:

1) Designated on Uniform Settlement Statement - the Uniform Settlement Statement (Form HUD-1) must clearly designate the amounts as points payable in connection with the loan; for example, as “loan origination fees” (including amounts so designated on VA and FHA loans), “loan discount,” “discount points,” or “points.” The amounts designated as points on the Form HUD-1 may be shown as paid from either the borrower's or the seller's funds at settlement.

2) Computed as a Percentage of Amount Borrowed - the amounts must be computed as a percentage of the stated principal amount of the indebtedness incurred by the taxpayer.

3) Charged under Established Business Practice - the amounts paid must conform to an established business practice of charging points for loans for the acquisition of principal residences in the area in which the residence is located, and the amount of points paid must not exceed the amount generally charged in that area. If amounts designated as points are paid in lieu of amounts that are ordinarily stated separately on the settlement statement (such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes), those amounts aren't deductible as points under Rev. Proc. 94-27.

4) Paid for Acquisition of Principal Residence - the amounts must be paid in connection with the acquisition of the taxpayer's principal residence, and the loan must be secured by that residence. Rev. Proc. 94-27 doesn't apply to points allocable to an amount of principal in excess of the aggregate amount that may be treated as acquisition indebtedness under IRC § 163(h)(3)(B)(ii).

5) Paid Directly by Taxpayer - the amounts must be paid directly by the taxpayer. An amount is so paid if the taxpayer provides, from funds that haven't been borrowed for this purpose as part of the overall transaction, an amount at least equal to the amount required to be applied as points at the closing. The amount provided may include down payments, escrow deposits, earnest money applied at the closing, and other funds actually paid over by the taxpayer at the closing. In addition, for these purposes, points paid by the seller (including points charged to the seller) in connection with the loan to the taxpayer will be treated as paid directly by the taxpayer from funds that have not been borrowed for this purpose, provided the taxpayer subtracts the amount of any seller-paid points from the purchase price in computing the residence's basis.

If any of the above requirements are not met, the buyer must deduct the seller-paid points over the life of the loan.

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