Seller Points, Buyer Basis

Estimated reading time: 5 minutes

Seller-paid mortgage points can affect two different tax records: the buyer’s home basis and the buyer’s possible mortgage-interest deduction. Recording one correctly does not settle the other. A reduction in basis is not a tax bill today, and a possible deduction is not a dollar-for-dollar refund.

This guide explains a 2025 U.S. federal income-tax example using the IRS’s 2025 publications available when checked on November 4, 2026. It is not a calculation of your return. For a different tax year, confirm the applicable year’s rules before filing.

Start by identifying what the seller actually paid

Discount points are upfront loan charges associated with a lower interest rate. The CFPB explains that one point equals 1% of the loan amount, not 1% of the home’s price. On a fictional $240,000 mortgage, two points would be $4,800, even if the house costs $300,000.

A general seller closing-cost credit is not necessarily all points. The credit might cover several different charges. Find the actual points entry and the allocation between borrower and seller rather than taking the total seller concession as your points figure. Ask the lender or settlement agent to explain an unclear entry.

Keep the final Closing Disclosure, any corrected disclosure, the purchase agreement and relevant lender correspondence together. A preliminary estimate can help explain the negotiation, but it may not show the charges ultimately paid.

The basis adjustment comes first

IRS Publication 530 says buyers who purchased their homes after April 3, 1994 must reduce basis by points the seller paid for their mortgage. The rule is not limited to buyers who successfully claim a current-year deduction.

Basis is the property’s tax-cost record. It is not the outstanding loan balance, down payment, appraisal value or cash available from a future sale. Some acquisition costs can increase basis, while other adjustments reduce it. Publication 530 distinguishes eligible property-acquisition closing costs from financing-related charges.

Here is a separate, deliberately simplified fictional 2025 purchase, unrelated to the $4,800 points example above:

• Home purchase price: $300,000.
• Verified seller-paid mortgage points: $6,000.
• Assumed other basis adjustments: none.
• Starting basis after this adjustment: $300,000 minus $6,000, or $294,000.

The $6,000 reduction is a recordkeeping entry. It does not mean the buyer saved $6,000 in tax, owes $6,000 immediately, or has a mortgage balance of $294,000. Those are separate calculations requiring different facts.

Check deduction eligibility separately

IRS Topic 504 explains that qualifying points may be deductible as mortgage interest for taxpayers who itemize. It identifies conditions for deducting purchase points in the year paid, including use of the cash accounting method, a mortgage secured by the principal residence, qualifying use of the loan, customary local points and sufficient qualifying funds at closing. Seller-paid points can count toward that funds test, with the required basis reduction.

Do not stop after checking only one condition. Publication 936 contains the full tests, including percentage-based calculation, clear settlement-statement identification and the requirement that points not substitute for separately stated service charges. Mortgage-interest limits can also restrict the deduction.

If full deduction in the payment year is unavailable, that does not automatically make every charge deductible later. Publication 936 explains rules for spreading qualifying points over the mortgage term. Refinancing and second-home points require separate treatment; do not copy a main-home purchase answer into those situations.

Why a deduction does not equal tax savings

Suppose, only to illustrate the arithmetic, a buyer is allowed a $6,000 deduction and every dollar actually reduces income taxed at an assumed 22% marginal rate. The multiplication is $6,000 times 22%, or $1,320. The deduction is $6,000; the illustrative reduction in tax is $1,320.

That simplified result assumes away the standard-deduction comparison, deduction limitations and other interactions. It is not a promised benefit. If those conditions do not hold, multiplying the points by a tax bracket can overstate the result. Ask your preparer to compare the complete return with and without the eligible deduction, rather than quoting the face amount as savings.

Why keep the basis record for a future sale?

IRS Publication 523 uses adjusted basis to calculate home-sale gain or loss, then separately addresses whether gain can be excluded. A possible home-sale exclusion is not a reason to discard the original basis calculation.

Extend the fictional example by assuming a later amount realized (sale price minus selling expenses) of $390,000, no intervening basis adjustments and no special circumstances. Subtracting the correctly recorded $294,000 basis gives $96,000 of gain before any exclusion analysis. Using $300,000 instead would show $90,000, understating that intermediate gain by $6,000. Neither figure tells us the taxable gain or tax owed without the remaining sale facts.

A practical two-record checklist

• Basis file: record purchase price, verified seller-paid points, other separately reviewed adjustments and the supporting closing documents.
• Tax-year file: record the deduction eligibility analysis, amount claimed, any permitted spreading over time and the applicable publication year.
• Reconciliation: compare Form 1098 with the closing records. Publication 936 cautions that reported points are not automatically all deductible, and some eligible points may not appear on that form.
• Questions to resolve: ask who paid each charge, whether it is genuine points or a service fee, and which rule supports its treatment.

Get individual tax advice for mixed personal/rental use, multiple owners, unusual concessions or an already-filed return that may be wrong. The useful habit is simple: preserve the basis adjustment even while the deduction question is still being resolved.