The recent decline in interest rates has created excitement in the real estate market, offering potential homebuyers new opportunities to achieve their dream of homeownership. If you’re in the process of buying a home or have recently purchased one, you may wonder if you can deduct mortgage points paid by the seller. The answer is “yes,” but there are some key limitations to keep in mind.
Understanding mortgage points
Mortgage points are upfront fees charged by your lender, typically expressed as a percentage of the loan amount. If you itemize your deductions, these points may be deductible. While buyers usually cover this cost, sellers sometimes agree to pay the points to make the deal more attractive.
In most cases, points paid by the buyer are considered a deductible interest expense. The same can be true for points paid by the seller on behalf of the buyer.
For example, suppose you buy a home for $600,000. In connection with a $500,000 mortgage loan, your bank charges two points, or $10,000. The seller agreed to pay the points to close the sale.
You can deduct the $10,000 in the year of the sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more 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. You 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.
Important limitations
There are several limitations to the rule allowing deductions for seller-paid points. The deduction does not apply to points that are:
- Allocated to the portion of a mortgage exceeding $750,000 ($375,000 for married individuals filing separately) for tax years 2018-2025 (or $1 million for tax years before 2018 and after 2025)
- Paid on a loan used to improve an existing home
- Paid on a loan for a second home, investment property, or business property
- Paid in connection with refinancing, home equity loans, or lines of credit
Reviewing your tax deductions
If you’re unsure whether the points from your home purchase are deductible, contact your wealth advisor to review the details of your situation. If you are not a Mercer Advisors client and would like to discuss how these rules may apply to you, let’s talk.
- Higham, Aliss. “Mortgage Forecasters Slash Their Predicted Rates for End of 2024.” Newsweek, 2 October 2024.
