Can I claim home closing costs related to interest rate buydown made by the seller on my behalf?
The seller bought points to lower my interest rate on my behalf when buying a home this year. Can I itemize this on my taxes?
Answers
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Hello,
Those are often referred to as Points. That is pre-paid interest to buy down the rate on the loan. You can only claim a deduction for points you actually paid for.
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Matt,
Under IRS publication 936, page 6, section “Deduction Allowed in Year Paid”:
9. The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
This applies to me so I would think I could deduct these costs?
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Good catch!
Within Topic No. 504, the IRS states "amounts the seller pays for points on your loan is treated as paid directly by you from unborrowed funds, provided you subtract the amount of the seller-paid points from your basis (purchase price) in your home."
Thus, as long you deduct the points the seller pays from the basis, which determines the gain/loss when you sell the home, you can deduct the points the seller pays. For most taxpayers, this is beneficial as when you sell the home, you may qualify for the main home exclusion.
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AlexO,
Can you provide clarity around the last bit?
“..provided you subtract the amount of the seller-paid points from your basis (purchase price) in your home."
To the second part of your response, is this relevant if I were to sell the home? I do not intend to sell the home any time soon and so I am not sure if that is immediately applicable for this tax return?
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Certainly! I'm happy to provide clarification.
Reducing the basis by the seller-paid points won't affect your immediate tax return. When you sell the home, it may increase the gain you need to realize. I think an example may help clarify:
Say you bought the home for $100,000 but deducted $5,000 of the seller-paid points when you filed your return. Your basis would then be $95,000. Say in 10 years, you sell the home for $200,000. Your gain on the sale of the home would be $105,000 instead of $100,000 had you not deducted the seller-paid points.
However, as mentioned in my prior response, given that when most taxpayers sell their main home, they qualify to exclude $250,000, $500,000 if filing jointly, it's generally to your benefit to deduct the seller-paid points.
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So since I’m not intending to sell, I can deduct points paid be the seller on this years return and not be concerned with what I assume was the main home exclusion in the last part of your response?
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Correct. You don't need to be concerned about a decrease in the basis of the home for this year's tax return.
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Thank you for your time and effort, AlexO!
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Yes, you may be able to claim home closing costs related to interest rate buydown made by the seller, but it depends on various factors such as your specific situation and tax laws in your jurisdiction. Typically, points paid by the seller are considered a reduction of the purchase price rather than a deductible expense for the buyer. However, certain closing costs might be deductible, such as prepaid interest and property taxes. It's advisable to consult with a tax professional or accountant to determine which expenses are eligible for deduction based on your circumstances and applicable tax regulations. It's important to consider the disadvantages of seller paying closing costs, such as potentially higher purchase price or stricter negotiation terms.
