How are real estate points treated for tax purposes?

Real estate points, often referred to as loan origination fees or discount points, are generally fully deductible in the year they are incurred when they are paid in the context of purchasing or improving a primary residence. This deduction is allowed because points are considered pre-paid interest, which the IRS permits to be deducted in the year they are paid, provided certain conditions are met.

For instance, if a taxpayer pays points to secure a mortgage on their primary residence, the full amount paid can be deducted from their taxable income in the year of payment. The deduction is contingent upon meeting specific requirements, such as the points being calculated as a percentage of the loan amount, the loan being secured by the taxpayer's main home, and the points not being an excessive amount compared to the prevailing rate in the area.

Other options, like adding points to the basis or spreading deductions over the term of the loan, do not align with the IRS guidelines regarding points applied to primary residences. The outright non-deductibility of points is also not applicable under the typical conditions outlined for primary home purchases, where the deduction is commonly claimed. Thus, the understanding that points are fully deductible in the year incurred encapsulates an important aspect of tax treatment for homeowners and real estate transactions.