Rev. Rul. 69-184: Tax Treatment of Loan Points

An Internal Revenue Service (IRS) Revenue Ruling is an official interpretation of tax law. For homeowners, Revenue Ruling 69-188 addresses the tax treatment of “points” paid to a lender to secure a loan. This ruling establishes the framework for determining if these common financing fees are deductible.

The Core Principle of the Ruling

In the context of a loan, “points” are a form of prepaid interest, with each point equal to one percent of the loan amount. The revenue ruling establishes that points paid by a borrower for the “use or forbearance of money” are considered interest and may be deductible. This contrasts with payments made to compensate the lender for specific services performed in originating the loan.

The ruling emphasizes that a fee is not considered interest if it is for a distinct service, even if it is called “points” on the settlement documents. The burden falls on the taxpayer to demonstrate that the payment was for the use of the funds and not a charge for the lender’s administrative work. The language of the ruling sets a standard that looks beyond the labels used by the lender. A fee labeled “loan origination fee” could be deductible interest if it is not for any specific service, while a fee labeled “discount points” would not be deductible if it was a charge to cover underwriting costs.

Identifying Deductible vs. Non-Deductible Points

Points That Qualify as Interest

The most common example of deductible interest is “discount points,” which are fees paid by the borrower to lower the stated interest rate on their mortgage. Since these payments directly affect the cost of borrowing money, they fit the definition of interest. A “loan origination fee” can be deductible if it is not allocated to any specific service and is simply a charge for providing the loan itself. These amounts should be clearly itemized on the settlement statement.

Fees for Specific Services

Many charges paid at closing are not deductible as interest because they pay for specific services. These are considered part of the cost of acquiring the property, not the cost of borrowing money. Common examples of these non-deductible service fees include:

• Appraisal fees
• Inspection fees
• Title fees
• Attorney fees
• Property survey charges
• Notary fees
• Document preparation fees
• Credit report fees

These charges compensate the lender or third parties for the work involved in processing the loan and closing the real estate transaction.

Requirements for Current Year Deduction

Even if points qualify as deductible interest, they must be deducted over the life of the loan. An exception exists for points paid on a loan to purchase or improve a principal residence. The IRS established requirements in Revenue Procedure 94-27 that a taxpayer must meet to deduct the full amount in the year paid. The loan must be secured by the taxpayer’s main home, the payment of points must be an established business practice in the area, and the points charged must not be excessive. The amount must also be designated as “points” on the settlement statement, be computed as a percentage of the loan, and be paid directly by the taxpayer with funds other than the loan proceeds.

Application in Different Scenarios

Home Mortgage Refinancing

The rules for deducting points change in a refinancing transaction. When a taxpayer refinances an existing mortgage on their principal residence, the points paid are not fully deductible in the year paid because the loan is not for the original purchase of the home. Instead, the deduction must be taken ratably, or amortized, over the life of the new loan. For example, if a taxpayer pays $3,600 in points on a 30-year (360-month) refinanced mortgage, they can deduct $10 for each monthly payment made during the year. If a portion of the refinanced loan proceeds is used for substantial home improvements, the points allocable to that portion may be deducted in the current year.

Seller-Paid Points

In some transactions, the seller agrees to pay some of the buyer’s points to the lender as a sales incentive. Per guidance in Revenue Procedure 94-27, the homebuyer can treat these seller-paid points as if they paid them directly. This means the buyer can deduct the seller-paid points in the year of purchase, provided they meet all other requirements. The buyer must subtract the amount of the seller-paid points from the purchase price of the home when calculating their cost basis. This is an important step, as the adjustment affects the calculation of any taxable gain when the home is eventually sold.