Hi,

I took out a mortgage on a new house last year. I read online that the origination fee is only tax deductible if it is a percentage of the loan and is not deductible if it is a flat amount. I looked through the IRS Publications and didn't see this mentioned. Is this correct?

Also, if I received a lender credit larger than the origination fee in return for accepting a higher interest rate, is the origination fee still deductible? On my HUD statement, it lists this as follows: Origination fee -- $600, Points or credit -- ($2000 credit), Net origination fee -- ($1400 credit).

Thanks very much for these excellent boards. They are a great resource.

Mike

Hi Mike,

Here are the rules for when points are deductible according to our friends at the IRS:

Topic 504 - Home Mortgage Points

The term "points" is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest, and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A. If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $1,000,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points. See Publication 936, Home Mortgage Interest Deduction, to figure your deductible points in that case. For more information on deducting interest, refer to Topic 505.

You can deduct the points in full in the year they are paid, if all the following requirements are met:

1. Your loan is secured by your main home (your main home is the one you live in most of the time).

2. Paying points is an established business practice in your area.

3. The points paid were not 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 were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.

6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot 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
The amount is clearly shown as points on your settlement statement.

Points that do not meet these requirements may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and the points were paid for the use or forbearance of money and were not a charge for services provided by the lender as part of a loan origination fee and you meet the first six requirements stated previously, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the seller's return, but they are a selling expense which will reduce the amount of gain realized. Points paid by the seller may be deducted by the buyer provided the buyer subtracts the amount from the basis, or cost, of the residence. Points you pay on loans secured by your second home can be deducted only over the life of the loan.




I hope this helps you out. If not, please post a follow up question.

Zip Code: 01801

Thanks for your reply, Andrew. So just to clarify, is the term "origination fee" used interchangably with the term "points"? If so, it sounds like a flat origination fee (not a percentage of the loan amount) could be deducted over the life of the loan. Is this your usual practice?

Thanks again for your time and helpful advice.
Mike

The terminology and the interpretation is probably more complicated than it needs to be. But that's with every aspect of the tax code these days.

I took a look at the information I cut and pasted from the IRS site, and it looks like the 8th bullet states:

8. [To be allowable]the points were computed as a percentage of the principal amount of the mortgage, and the amount is clearly shown as points on your settlement statement.



Based on this bullet point, if the amount for the origination fees is a flat amount and not a percentage of the amount borrowed, then I'm not sure it's deductible. What did your tax person or Turbo Tax tell you about deducting these origination fees?

Zip Code: 01801