Rev. Rul. 68-650

Advice has been requested whether a loan charge paid by the seller of a residence to assist the purchaser obtaining a mortgage loan is deductible as interest under section 163(a) of the Internal Revenue Code of 1954.

The taxpayer sold his home for a total contract price of 1,200 x dollars. The taxpayer received from the purchaser an initial payment on the contract of 200 x dollars. The purchaser obtained a mortgage loan from a lending institution for the balance due under the contract. The loan was insured by the Federal Housing Administration. In connection with assisting the purchaser in obtaining this 1,000 x dollar loan, the taxpayer paid 50 x dollars to the lending institution. The loan closing statement indicates that the taxpayer paid this amount in the year of sale by accepting 950 x dollars from the lending institution in full satisfaction of the balance due on the sales price. The loan closing statement shows that the full 1,000 x dollar loan proceeds were credited to the taxpayer's account and that this account was then reduced by 50 x dollars. The charge of five percent of the amount of the loan is commonly referred to both as a `loan placement fee' and as `points'.

Section 163(a) of the Code provides that there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. In order for a taxpayer to deduct a loan charge as interest, the charge must be on his own obligation. Payments made on an obligation of another are not deductible as interest. Chester A. Sheppard v. Commissioner , 37 B.T.A. 279 (1938).

In the instant case, the 1,000 x dollars were borrowed by the purchaser and not by the taxpayer. The indebtedness was the indebtedness of the purchaser and the proceeds of the loan were used for his benefit in paying for the house. Accordingly, the taxpayer may not deduct the 50 x dollars as interest under section 163(a) of the Code. However, since the taxpayer paid this charge as a condition to the arrangement of financing terms for the buyer of his house, he incurred a cost in connection with effecting the sale that reduced the amount realized by him on the sale from 1,200 x dollars to 1,150 x dollars.