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Is Mortgage Loan Origination Fee Tax Deductible?

Scholasticus K Jan 9, 2019
In most cases mortgage loan origination fee is tax deductible, though there are some rules to be followed in order to make it tax-free. Here we try to find out the criteria that enables tax deduction.
When a person opts to borrow a mortgage loan, and gets the same sanctioned by the way of processing the loan application, he has to pay some upfront costs, known as closing costs.
These costs are in no way small or minor and hence, the Internal Revenue Service (IRS) has opted to provide for certain deductions, upon the completion of certain conditions, whereby a recent borrower can deduct mortgage loan origination fees from his/her Adjusted Gross Income (AGI).
There are certain conditions which are to be fulfilled. Further more you will also need to heavily rely on the HUD-1 Settlement Statement and the Topic 504 - Home Mortgage Points of the IRS, in order to get the definition of origination fees, point and also the conditions of deduction. Here's an explanation to this puzzle of compliance, completely decoded.

Mortgage Loan Origination Fees and Home Mortgage Points

When we take up a mortgage loan, get it approved and disbursed, we incur a bundle of costs. These are called closing costs, as they are incurred during closing of the loan. The closing costs include, commissions, fees and charges and most important, 'points'. Arithmetically, one point is 1% of the principle value of the mortgage, which applies in all cases.
'Points' are manly made of 3 crucial elements - loan origination fees, loan charges, loan discounts. Here we concentrate on the application of IRS rules, regulations and laws for loan origination fees. Mortgage loan origination fee is paid to loan's originator to pool in the loan, or generate it, process the application, underwrite the loan and disburse it.
Now there are cases, where fees are levied as a part of origination fees. The deduction of all origination fees comes under a certain debate, and may be denied in some cases. Apart from that, one needs to also note that some costs included within the mortgage origination fees are not deductible, under certain circumstances, as given further.

Is Mortgage Loan Origination Fee Tax Deductible?

The head or class of 'points' as mentioned here includes, elements such as, loan origination fees, loan charges and loan discounts. The points (1% of loan value) can be deducted in the very same financial year, when you take the loan and at the same time fulfill the given conditions as laid down by the IRS Topic 505 - Home Mortgage Points.
IRS further defines 'points' as charges, paid to obtain the home mortgage loan.
  • The loan needs to be secured to your main house and should be used as a home mortgage to buy main house.
  • Paying of points needs to be an established business practice in the area.
  • Points paid also should be equal or more than those in the area.
  • The cash method is to be adopted.
  • The points are not to be paid for or in lieu of any closing cost except origination fees.
  • Points have to be paid for during or before closing of the loan. These cannot be borrowed but can be permanently borne, fully or partially by a lender.
  • The amount is to be mentioned in the HUD-1 Settlement Statement, as percentage and in form of points, they form.
If these conditions are not fulfilled then you cannot deduct the points, from that very year's annual return or Adjusted Gross Income (AGI). From the point of view of deductions, you need to bear in mind two very important conditions.
  • The origination fee needs to be a pure origination fee and though the definition states that points are defined to be 'certain charge to obtain a home loan', some origination fees which are paid in the lieu of other charges or fees cannot be deducted. Similarly, quasi-origination fees which are not 'pure' cannot be deduced.
  • Secondly, origination fees have to be represented on the HUD-1 Settlement Statement in the form of points or percentage.
Cost such as commission, disbursement fees, appraisal fees, notary fees, when included in the head 'origination fees', cannot be deducted. Fees which are connoted or included in the term origination fees but do not qualify for the aforementioned conditions can be deducted in the subsequent life span of the loan as it amortizes.
These are of course subject to the conditions of the itemized deductions and provisions of Publication 936, Home Mortgage Interest Deduction. Points can be deducted at Schedule A, Line 10 of Form 1040. If your acquisition debt exceeds $1 million and home equity debt exceeds $1,000,000, then the points cannot be deducted within one year.
Some other loans also tend to have similar deductions which can be used, for example, there is the home equity line of credit.
It must be noted that there is no specific definition of the origination fees which are deemed to be deductible, they are more of to be understood and connoted, again the condition being that they fit the aforementioned compliance.
Be noted that the aforementioned facts are liable to personal interpretation, confusion and misunderstanding and also changes as and when applied by the IRS. Hence confirm with the IRS website for any clarifications or consult an attorney.