If you bought your main home since the beginning of 1991, and the seller paid the mortgage points on your behalf, the ruling allows you to deduct those points. The result could be a refund of taxes that you paid in the year of sale.
Points are up-front fees charged by a mortgage lender, expressed as a percentage of the loan principal. They are normally the buyer's obligation. But because the real estate market has been weak, sellers have sometimes sweetened the deal by agreeing to pay the points on the buyer's mortgage loan.
In most cases, points that the buyer pays are a deductible interest expense. But until recently, IRS had refused to allow buyers to claim an interest deduction for points that the seller paid.
IRS has now reversed itself, and says that seller-paid points are deductible. And it has made its change of position retroactive to the beginning of 1991.
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.
Under the old rule, you couldn't deduct the $10,000. And, your tax basis in the home was $600,000. That is the figure used to compute gain or loss when you sell the home.
Under the new rule, you 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 the over-55 gain exclusion. You may roll the gain over into a new home. Or, you may die owning the home, in which case its basis becomes its fair market value and the gain is eliminated.
There are some important limitations on the new rule allowing a deduction for seller-paid points. The rule doesn't apply: