In its latest report, the National Association of Realtors (NAR) announced that July 2022 existing home sales were down but prices were up nationwide, compared with last year. “The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun. However, he added that “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.” If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. The answer is “yes,” subject to some important limitations described below. Basics of points Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points, which may be deductible if you itemize deductions, are normally the buyer’s obligation. But a seller will sometimes sweeten a deal by agreeing to pay the points on the buyer’s mortgage loan. In most cases, points that a buyer pays are a deductible interest expense. And seller-paid points may also be deductible. Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale. You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain 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 anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence. Important limits There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn’t apply: To points that are allocated to the part of a mortgage above $750,000 ($375,000 for married 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 (rather than buy) a home; To points on a loan used to buy a vacation or second home, investment property or business property; and To points paid on a refinancing, home equity loan or line of credit. Tax aspects of the transaction Contact us to review with you in more detail whether the points in your home purchase are deductible, as well as discuss other tax aspects of your transaction.