Ruling Rev. Proc. 94-27, 94-1 CB 613 — Sally sells her home Bob and pays 000 points for mortgage receiving — The seller cannot deduct current year interest there debt which relate

Sally sells her home to Bob and pays $ 9,000 in points for Bob’s mortgage, by receiving $ 9,000 less in sale proceeds. Determine the tax effects on both parties.

SOLUTION

The seller cannot deduct the points in the current year as interest, as there is no debt to which the points relate. However, buyers may claim a tax deduction for points paid in connection with the purchase of a principal residence even if the seller of the property pays the points. Under this rule, the seller is treated as having paid the amount of the points to the buyer who, in turn, is treated as having used that cash to pay the points charged by the lender. The amount of the seller-paid points is subtracted from the purchase price in computing the basis of the residence. (RIA, FTC – Table of Contents: Chapter K, Keyword: points paid seller K-5026, K-5027 K-5179, K-5178)