Home Sale - adding points to basis

[cookm716]

I sold my primary home in 2023.  I paid loan points at initial purchase, and at each of the 4 refinances I did over 26 years prior to sale.  I never deducted any of these points.  Can I now add all of them to the basis for determining gain, or can only add in the ones I paid on the original loan?

[MonikaK1]

Amounts that qualify as points may either be deductible at the time they are paid or deducted ratably over the life of the loan. They aren't an addition to the basis. 

You can deduct the points to obtain a mortgage or to refinance your mortgage to pay for home improvements on your principal residence, in the year you pay them. In general, points to obtain a new mortgage, to refinance an existing mortgage, or paid on loans secured by your second home are deducted ratably over the term of the loan.

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you can't deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. See IRS Publication 936 for more information.

Many other settlement fees and closing costs for buying the property become additions to your basis in the property, including:

• Abstract fees.
• Charges for installing utility services.
• Legal fees.
• Recording fees.
• Surveys.
• Transfer taxes.
• Title insurance.

If you sold your main home during the current tax year, TurboTax can determine if you need to report the sale on your tax return. Generally, profits of up to $250,000 (up to $500,000 on a joint tax return) don't need to be reported to the IRS. TurboTax can figure this out for you.

To enter the sale of a personal residence in TurboTax Online:

• Click on Federal Taxes
• Click on Wages and Income
• Scroll down to Less Common Income
• On Sale of Home (gain or loss), click the start or update button

If your gain on the sale will be less than the applicable limit, and if it was never used for business or as a rental, and you didn't receive a Form 1099-S, you don't need to report the sale on your return at all. Not having to report the sale could save you from needing to upgrade your TurboTax product.

See this article for more information on determining the gain on the sale of your home.

[Opus 17]

Short answer, you can't deduct any points, and they don't add to basis.

Long answer: You could have deducted the points on the purchase mortgage in the year you purchased the home, or you spread the points out over the life of the loan, depending on the circumstances.  Then, with each refinance, you either could have (a) deducted the remaining points from the prior loan, and then deducted the points from the new loan over the life of the loan, or  (b) added the points from the prior loan to the points from the new loan, and restart your deduction over the life of the loan, again depending on the circumstances.  (Deducted over the life of the loan means that, if this was a 30 year or 360 month loan, you deduct 1/360th of the points for each monthly mortgage payment you made in the tax year.)  Then finally, when selling the home and paying off the mortgage, you can deduct any remaining points that are left, based on 26 years of payments and calculations.

The amount of points you can deduct in 2023 is the amount of point that you could deduct if you had kept those records for the past 26 years of payments, refinance points, and so on.  You can't deduct all the points you never deducted, only the points you could normally deduct now if you had been deducting them all along.

If you have reliable records and you can determine what your remaining points are, that is what you can deduct this year.  Keep accurate records because, if audited, the IRS does not have to award any deduction that you can't prove with reliable records.  

Also FYI, the only adjustments to basis that are allowed are items that you would have had to pay even if you bought the home with cash.  That might be inspection fees required by local law (if a radon inspection is required, for example), or transfer taxes and mortgage recording fees.  Fees that you only pay to obtain a mortgage (including application fees, appraisal fees, and points) are never added to basis.  Points can be deducted as a form of mortgage interest using the interest deduction, not a basis adjustment.

[cookm716]

Thank you both for your thorough replies.  Much appreciated.

[fanfare]

On your first mortgage, you don't have an option.

you have to itemize points over the term of the mortgage.

[Opus 17]

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@fanfare wrote:

On your first mortgage, you don't have an option.

you have to itemize points over the term of the mortgage.

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No, it's the opposite.  On the mortgage you used to buy the home, you may have the option to deduct the points all at once, depending on certain factors.  If you don't qualify, then you amortize the points.  On any refinance, you can only amortize (with or without rolling the remaining prior points into the new amortization, again, based on certain factors.)

[zomboo]

I am going to add my take in the form of a questions rather than a statements of fact (but I believe to be true). First, the certain factors you mentioned are that the points charged for the original mortgage are deductible in the year the mortgage originated up to the sum of cash paid by the seller and buyer. It doesn't matter what the cash was put up for. It could be for the down payment for example.

Second, the costs of obtaining the original mortgage, appraisal, inspections, title fees and so on, are included in the basis for the property.

[fanfare]

IRS says (Pub 530):
General rule. You can't deduct the full amount of points in the year paid. They are prepaid interest, so you must generally deduct them over the life (term) of the mortgage."

They then go on to list nine tests that all must be satisfied to allow a full deduction.

Considering the general rule, the implication would be that the tests are rarely met.

@zomboo 

[Opus 17]

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@zomboo wrote:

Second, the costs of obtaining the original mortgage, appraisal, inspections, title fees and so on, are included in the basis for the property.

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No.  Basis never includes costs needed solely to obtain a mortgage.  Some fees that may be customary or required even for cash customers (like an inspection or county transfer taxes and title fees) are allowed even if they are also part of getting a mortgage.  Fees that are only connected with a mortgage (like appraisal, application fee, bank attorney fee) are never adjustments to basis, even for a first (purchase) mortgage. 

See IRS publication 523, page 8.  Also see publication 551, Basis of Property,

Settlement costs.

Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.

[Opus 17]

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@fanfare wrote:

IRS says (Pub 530):
General rule. You can't deduct the full amount of points in the year paid. They are prepaid interest, so you must generally deduct them over the life (term) of the mortgage."

They then go on to list nine tests that all must be satisfied to allow a full deduction.

Considering the general rule, the implication would be that the tests are rarely met.

@zomboo 

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There's nothing difficult or special about the 9 conditions.  Did you read them?  Nothing there is likely to trip up a typical borrower except 5 and 6.  I qualified every time I bought a house.  

[zomboo]

You are actually agreeing with me. I think my statement was worded wrong. Instead of "Second, the costs of obtaining the original mortgage, appraisal, inspections, title fees and so on, are included in the basis for the property.", I should have said "Second, the original costs of buying the home obtaining the original mortgage, appraisal, inspections, title fees and so on, are included in the basis for the property." These cost are included in the basis even if they are rolled into the original mortgage but not when you refinance.