How to treat Points PrePaid by the Seller


T

Tax Tip

A point is interest that has been pre-paid in an effort to "buy down"
the fixed interest imposed on a mortgage. One point is 1% of the
mortgage, and paying a point can usually lower the interest by .25%.

In a property SALE (not refinance), if the Points are pre-paid by the
SELLER, then:

Treatment by seller - do not deduct these fees as an interest expense.
Seller paid points are a selling expense that reduces the gain
realized by the seller on the sale.

Treatment by buyer - reduce the basis of the property by the amount of
the seller-paid points, and treat the points as if the buyer paid
them.
(For a Home Purchase - Deduct all points as mortgage interest on
Schedule A, For a Rental Purchase - Deduct points over the life of the
loan on Schedule E)

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