One of the great things about becoming a homeowner is the tax deductions you will receive. However, knowing what you can use as a tax deduction and what you can’t is a bit confusing and something you will need learn if you want to stay out of trouble with the IRS. You undoubtedly signed a mountain of paperwork at your closing, but do you really know what you signed? Since you probably aren’t in the habit of frequently buying houses, you aren’t expected to know everything. That’s what your agent is for. But now that you’ve closed on your house, moved in and have finally gotten settled, you might be thinking that’s where all the real estate jargon ends. But that’s not the case because you will once again have to go back to your closing paperwork when it comes time to do your taxes. You will need that paperwork to determine what your allowable deductions are and how you need to properly file them with your tax return. Therefore, we are going to talk about one piece of the puzzle which is the loan origination fee.
What Is a Loan Origination Fee?
A loan origination fee is what the lender will charge you for all the paperwork and documentation that’s associated with your real estate transaction from start to finish. The loan origination fee is not only the fees associated with your loan, but it also includes a fee that’s paid to the loan officer who initiates and completes your loan transaction as well. Additionally, he is only paid if and when the loan funds. So in other words, part of the loan origination fee serves as a commission to the broker who got you the loan. Loan origination fees are usually broken down into mortgage points, which are simply a percentage of your loan amount. And that’s the topic we are going to talk about next.
What Is the Average Loan Origination Fee?
Generally, loan origination fees will vary based on your broker and how complicated your loan is. However, most loan origination fees are somewhere between a half of a percent to two percent of the total price. And each percent is considered one point when dealing with a real estate transaction. Now don’t confuse discount points with loan origination points because they are two completely different things, although they are both listed as lender charges on the HUD-1 Settlement Statement and the Good Faith Estimate.
Are Loan Origination Fees Tax Deductible?
Now that we have explained what the loan origination fees are and how they work, we are going to go over whether or not loan origination fees are tax deductible and if so which ones. So, are loan origination fees tax deductible? Well, the answer is yes and no. That means some of them are and some of them aren’t and to make matters even more confusing, some of them are but not initially.
When Is a Loan Origination Fee Tax Deductible?
Loan origination fees are tax deductible when the fees, which are commonly referred to as maximum loan charges reflect the prepaid interest on a loan. Additionally, if the seller pays a part of the interest for you, these are also tax deductible as well because you can claim a deduction for the points the seller paid.
However, there are times when your fees are tax deductible, but you can’t deduct them right away. If you want to deduct the points in the same year you closed on your home, you have to use that mortgage to build or purchase your home and you must also use that home as your primary residence. There are some other stipulations, as well.
- Charging points must be an established practice in your area.
- Your deduction can’t exceed the number of points commonly charged in your area.
- You can’t have borrowed the funds you used to pay your points.
- The settlement statement must show the amount of points that were paid towards the closing.
- The points must reflect a percentage of the amount of your mortgage’s principal.
When Is a Loan Origination Fee Not Tax Deductible?
Loan origination fees are not tax deductible when your lender uses them for the appraisal or title fees, any legal costs, or prepaid property taxes.
Do I Have Any Other Options For Deducting My Points?
Yes, you have the option of amortizing your points over the life of your mortgage. Usually, people only choose this option when their itemized deductions end up being less than their standard deductions for the year in which they purchased their home.
Where Can I Find The Deductible and Non-Deductible Loan Origination Fees?
You can find out which loan origination fees are deductible and which ones aren’t by looking at the settlement statement you signed at your closing. The settlement statement should clearly identify the prepaid interest which will help you separate the two types of fees. Remember, you can deduct the prepaid interest on your loan, but you can’t deduct the other miscellaneous fees such as the appraisal and title fees, the legal fees, or any of the prepaid property taxes.
Can I Deduct My Loan Origination Fees If I’m Refinancing?
If you paid points to refinance your mortgage, then you have to deduct those over the life of your loan, unless you’ve used some of that money to make improvements to your house. Another scenario is if you sell the home or refinance it again before your mortgage expires, then you can use any of those deductions you didn’t previously deduct in the year you sold or refinanced the home.
Note: We are not tax professionals. The content contained in this article is for informational purposes only. You should always consult with a tax advisor about your specific tax situation prior to filing your tax returns.
2 Point Highlight
1. One of the great things about becoming a homeowner is the tax deductions you will receive.
2. Knowing what you can use as a tax deduction and what you can’t is a bit confusing and something you will need learn if you want to stay out of trouble with the IRS.
