Academic journal article Journal of Accountancy

Seller-Paid Mortgage Points Deductible

Academic journal article Journal of Accountancy

Seller-Paid Mortgage Points Deductible

Article excerpt

The Internal Revenue Service has changed its position on the deductibility of mortgage points. According to revenue procedure 94-27, effective for taxable years beginning after December 31, 1990, home buyers may deduct mortgage points currently even if the points are paid by the seller of the property--as long as they reduce the property's cost basis by the amount of the seller-paid points.

Prepaid interest usually must be capitalized and deducted over the life of a loan. However, Internal Revenue Code section 461(g)(2) allows a current deduction for points paid on debts incurred to purchase or improve (and on debts secured by) a taxpayer's principal residence. The payment of points must be an established business practice in the area in which the debt is incurred and be consistent with the amount generally charged there. If the amounts designated as points are disguised as appraisal fees, inspection fees, title fees, attorney's fees or property taxes, they are not deductible.

Previously, under revenue procedure 92-12 buyers had to pay points themselves to obtain a current deduction. If a seller agreed to pay all or some of a buyer's points, the seller-paid points were not deductible. …

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