If you bought a house recently, it’s important to know which loan origination fees are tax deductible, and which are not. Understanding the difference will prove useful when you prepare to file your taxes.
Origination Fees vs Points
Technically, a loan origination fee is the fee the lender charges for loan processing. Points involve a loan discount fee. Every point, which is prepaid interest, is equal to 1 percent of the total loan. For example, if you have a $200,000 mortgage, each point is worth $2,000. For practical purposes, however, the IRS views both origination fees and points as prepaid interest.
You can deduct these points in the year you purchased the home if you meet several criteria, although you have the option of deducting them over the life of the loan. Most homeowners, however, do not want to deduct these fees over 20 to 30 years if they can do it all at once. To qualify for the same-year deduction, the home must serve as your primary residence or you are building a primary residence on the lot. If the property is a second home, you must deduct origination charges over the life of the loan. You cannot have paid more points than is usual in your area. Typically, buyers pay to two to three points on the loan, not five or six. You cannot take the deduction for points if they were paid in lieu of other fees, such as property taxes, legal fees, title insurance and the like. Points charged must appear on Form HUD-1, the Uniform Settlement Statement. You can only deduct these costs if you itemize deductions on Form 1040, Schedule A.
Non-Deductible Closing Costs
While a loan origination fee is tax deductible, many other closing costs are not. These include appraisals, mortgage insurance, real estate commissions, legal fees, flood certification and the like. Aside from origination charges and loan discount fees, the only deductible items are property taxes and mortgage interest paid.
Changes in 2018
The new Tax Cuts and Jobs Act bill raised the standard deduction to $12,000 per single person. That means a married couple filing jointly has a standard deduction of $24,000. If your itemized deductions, including loan discount fees, are less than the standard deduction, you will likely opt not to itemize on your federal income tax form. The new law also caps the amount of state and local property taxes you can deduct at $10,000, so if you live in a high-tax community, all of your property taxes are no longer deductible. If you closed on the loan for your home after Dec. 15, 2017, you cannot deduct mortgage interest on loans over a $750,000 limit.
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