Are lender paid points on a mortgage deductible by the buyer of a residential property?

[rbynaker]

Yes.  The real question is whether or not they're fully deductible in the first year (or if they have to be amortized).  The answer depends on these factors:

https://www.irs.gov/taxtopics/tc504

Everything gets mixed into the pot at closing so who knows who actually paid for what.  I'd guess that your deduct now vs. amortize may hinge on #6.

Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid. You can deduct the points in full in the year you pay them, if you meet all the following requirements:

1. Your main home secures your loan (your main home is the one you live in most of the time).
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid weren't more than the amount generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
5. The points paid weren't for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can't have borrowed the funds from your lender or mortgage broker in order to pay the points.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage, and
9. The amount shows clearly as points on your settlement statement.

Rick

[BobKamman]

I had not heard of lenders paying points -- usually, they charge points, and the issue is whether the buyer pays them or the seller pays them.  Maybe what you mean is lender credits.  I did find this:

Lender credits work the same way as points, but in reverse. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate.

Lender credits are calculated the same way as points, and may appear on lenders’ worksheets as negative points. For example, a lender credit of $1,000 on a $100,000 loan might be described as negative one point (because $1,000 is one percent of $100,000).

That $1,000 will appear as a negative number as part of the Lender Credits line item on page 2, Section J of your Loan Estimate or Closing Disclosure.  The lender credit offsets your closing costs and lowers the amount you have to pay at closing.