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George Saenz, the Bankrate.com Tax Talk columnistAre origination fees tax-deductible?

Dear Tax Talk,
I'm confused. I read that origination points are not deductible, but discount points are. My lender will not use discount instead of origination points, but claims that the origination point is still buying my rate down. Can this be true?

In another place on the World Wide Web, I read that origination points lose their deductibility if the lender bundles all the fees that are normally broken out separately (title fee, attorney's fee, etc.) into one and calls it an origination fee. But if the lender charges a point as an origination fee and then charges those other fees separately, in that case, is it deductible. Please clarify. Thank you!
-- Tom

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Dear Tom,
You're getting hung up on terminology. The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points also may be called loan origination fees, maximum loan charges, loan discount or discount points.

IRS Publication 530 says the following regarding points:

You can deduct the full amount of points in the year paid if you meet all the following tests:

  1. Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid were not more than the points generally charged in that area.
  4. You use the cash method of accounting. Most individuals use this method.
  5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees and 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. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money and other funds you paid at, or before, closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
  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.
  9. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.

You cannot deduct the points if they are in lieu of paying other ordinary costs of closing that are not deductible such as title insurance and attorney fees, hence the restrictions under points No. 2 and No. 3 above. So long as you're paying the points to buy (not refinance) your principal residence, your overall cash paid through deposits and at closing exceed the points charged, and you're not using the points to avoid other traditional closing costs, your points would be deductible as an itemized deduction on Schedule A.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: June 21, 2006
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