The recent drop in interest rates has sparked excitement in the real estate market. Lower mortgage rates and more homes for sale are creating great opportunities for buyers. Lawrence Yun, Chief Economist of the National Association of Realtors, says this combination could lead to more home sales in the coming months.
If you're buying a home or just bought one, you might be wondering if you can deduct mortgage points paid by the seller. The short answer is "yes," but there are some limitations to keep in mind.
What are Mortgage Points?
Points are upfront fees you pay to the mortgage lender, usually as a percentage of the loan. They're typically the buyer's responsibility, but sometimes the seller covers them to close the deal. If you itemize your deductions, points can usually be deducted as mortgage interest.
For example, say you buy a $600,000 home with a $500,000 mortgage, and the bank charges two points ($10,000). If the seller pays those points, you can deduct that $10,000 in the year of the sale. The downside is that your tax basis in the home drops to $590,000, which could lead to a bigger gain when you sell. But that might not matter, since you can exclude up to $250,000 ($500,000 for couples) of gain on the sale of your primary home.
Key Limits to Know
There are a few restrictions on deducting seller-paid points:
You can’t deduct points on the portion of a loan above $750,000 (or $375,000 for married couples filing separately) from 2018 to 2025.
Points paid for home improvements, second homes, investment properties, or business properties aren’t deductible.
Points on refinancing or home equity loans aren’t deductible.
We can help you figure out if your seller-paid points are deductible and answer any other tax questions you have about your home purchase. Notify your VAAS Tax Consultant at the time of your filing to discuss further.