Can You Deduct Points When They are Paid by the Seller?

So you bought a house and negotiated well and convinced the seller to pay your points.  Can you deduct them even though you didn't pay for them?  The surprising answer in this case is yes! However, they are subject to some important limitations as 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. And IRS says that seller-paid points may also be 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.

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.