Rules Changed for Deducting Seller-Paid Points

WASHINGTON - The Internal Revenue Service today announced that individuals may claim an income tax deduction for "points' paid in connection with the individual's purchase of a home, even if the points are paid by the seller of the property (so-called "seller-paid points"). The new rule is available for individuals who have purchased homes after December 31, 1990.

This deduction represents a change in the Service's previous position regarding seller-paid points, which had been viewed as nondeductible by the buyer. The seller of the property should be viewed as an adjustment to the purchase price of the home. The seller is treated as having paid the amount of the seller-paid points to the buyer, who in turn is treated as having used this cash to pay the points charged by the lender. Additionally, the cost of the home is reduced by the amount of the seller's payment for federal tax purposes.

Individuals who are entitled to a deduction for points paid in 1993 and who have not already filed their tax return should claim the deduction by including the amount paid on line 9a of Schedule A of their 1993 Form 1040 if the points were reported to the individual on Form 1098, or on lime 10 if the points were not reported on Form 1098. Individuals who have already filed their 1993 tax return and whose who are entitled to claim a deduction for points pain in either 1991 or 1992 should file an amended return on Form 1040X, and should write "seller-paid points" in the top right-hand corner of the form. Taxpayers filing amended returns also are instructed to attach to the return a copy of the settlement statement (often referred to as the "HUD-1") they received at the time of the closing.

The new treatment of seller-paid points will require lenders to include the amount of these payment on the Form 1098 information returns required to be provided to the Service and to taxpayers. In order to allow lenders sufficient time to prepare for this additional reporting requirement, however, the Service has waived the information reporting requirement for seller-paid points before 1995.

Revenue Procedure 94-27, containing more information, will be published in Internal Revenue Bulletin 1994-15 dated April 11, 1994.

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