Home sales and home prices are up compared to last year, even though the COVID-19 pandemic continues to hold steady across much of the country, according to the National Association of Realtors (NAR).
The reason may (or may not) be surprising: The work-from-home life many have adapted to.
According to NAR’s Chief Economist, Lawrence Yun, “With the sizable shift in remote work, current homeowners are looking for larger homes…”
With a new home purchase comes lots of questions. One common theme is mortgage points, or the practice of paying fees directly to the lender at closing to reduce the interest rate. Points are typically expressed as a percentage of the loan principle.
To incentivize potential buyers, sellers may sometimes agree to pay points on the loan. But many buyers wonder if they can still deduct mortgage points when they are paid on your behalf by the seller.
First and foremost, points are deductible only if you itemize deductions. However, whether the buyer or seller pays the points, they can be deducted. Let’s look at the following scenario:
If you purchased a house for $600,000 and took out a $500,000 mortgage. Your bank charged two points, which would be $10,000, but your seller agreed to pay the fees at closing.
You are able to deduct that $10,000 in the year of the sale. However, your tax basis would be reduced to $590,000, which means more gain if your later sell the home for a higher price. (Still, this is a hypothetical situation - you may not sell the house and even if you did, the gain might not be taxable.)
You also may qualify for an exclusion of up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.
Limitations to consider
While there are benefits to deducting seller-painted points, there are some restrictions. The following rule doesn’t apply:
- To points allocated to the portion of a mortgage above $750,000 ($375,000 for marrieds filing separately) for tax years 2018 through 2025 (above $1 million for tax years before 2018 and after 2025)
- To points on a loan used to improve, not buy, a home
- To points on a loan used to buy a vacation home, second home, investment property or business property
- To points paid on a refinancing, home equity loan or line of credit
If you are wondering if deducting your seller-paid points is the right tax move for you, Smolin Lupin can help you review your situation in detail, along with any other tax implications of your upcoming home purchase. Contact us today for an appointment.