What is 'Seller-Paid Points'
Seller-paid points refer an offer by a seller of an asset to rebate a portion of the purchase price to a buyer, or an offer to pay part of the associated costs of a transaction that are typically borne by the buyer. Seller-paid points are most commonly offered by the seller of a home to the buyer of a home as a means to reduce the interest the buyer must pay on their mortgage.
BREAKING DOWN 'Seller-Paid Points'
Seller-paid points are primarily attractive for the tax advantages. Unlike a listing price discount, seller-paid points can be deducted from the home buyer’s income taxes as mortgage interest. This makes seller paid points more attractive dollar-for-dollar than a straight discount.
Consider a home where the list price is $200,000, but you are willing to accept an offer of $195,000. You could reduce the list price by $5,000, or you could strategically offer $5,000 in seller points instead. You’d still end up with the same bottom line, but there are advantages to discounting through seller points.
Because most buyers are going to use mortgage financing to buy a home, they will have to pay an interest rate proportional to the amount they borrower. Seller points, in effect, increase a buyer’s down payment, thus reducing the interest rate paid on the debt. At the same time, the IRS often considers seller points as interest paid by the buyer of the home, reducing the buyer’s tax liability. This means that seller points can be three times as powerful an incentive to buying the home as a discount of the same amount. Your $5,000 seller point contribution in this example could end up having the same effect, in terms of reducing the buyer’s monthly payment, as a $13,000 discount on the listing price.
Tax Treatment of Seller-Paid Points
If you can deduct all of the interest on your mortgage, you likely will be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you can't deduct all the interest on your mortgage and you can't deduct all your points. In order to deduct points, the loan in question must be a loan to finance your primary residence.
To deduct points from your taxes, the loan must be used to finance your main home, and it must be established practice in your local area for lenders to offer points. The points must be computed as a percentage of the principal amount of the mortgage, and the amount must show clearly as points on your settlement statement.