Home buyers may deduct seller-paid points.

• Author: Friedman, Steven M.

The IRS has announced in Rev. Proc. 94-27 that individuals may claim a deduction for "points" paid in connection with the purchase of their principal residence, even if the points are paid by the seller of the property on their behalf. This change in policy was taken, according to the Service, to minimize possible disputes over the deductibility of points. Thus, as a matter of administrative practice, the IRS will treat as deductible points any amounts paid by cash basis taxpayers if the requirements of Rev. Proc. 94-27 are met.

The Service views the transaction as if the seller paid the points to the buyer, who in turn is treated as having used the cash to pay the points charged by the lender. As a result, the buyer must reduce the purchase price of the home by the amount of the seller-paid points. This view comports with proposed Sec. 6050H regulations concerning the lender's responsibility to report points charged to the borrower on Form 1098, Mortgage Interest Statement.

In order to qualify as deductible points, Rev. Proc. 94-27 requires that the amount:

1. Is clearly designated on the Uniform Settlement Statement (e.g., the Form HUD-1) as points (for example, as loan origination fees (including amounts so designated on VA and FHA loans), loan discount, discount points or points), regardless of whether shown as paid from the borrower's or the seller's funds at settlement;

2. Is computed as a percentage of the stated principal amount of the indebtedness;

3. Conforms to an established practice of charging points in the area in which the loan is issued; does not exceed the amount generally charged in the area; and is not being charged in lieu of amounts ordinarily stated separately on the settlement sheet (such as appraisal fees, inspection fees, title fees, attorney fees and property taxes);

4. Is paid in connection with the acquisition of the borrower's principal residence and such residence secures the loan; and

5. Is "paid directly" by the borrower. An amount is considered paid directly if it is provided by the borrower from funds (which may include down payments, escrow deposits, earnest money applied at closing and other funds actually paid over at or before the loan closing) that have not been borrowed from the lender of record. In addition, points paid by the seller (including points charged to the seller) will be treated as paid directly by the borrower, provided the...