Are Origination Fees Tax Deductible?
- Your lender calculates and charges an origination fee based on costs he incurs during the processing of your loan. An origination fee combines fees such as attorney fees, notary public fees, filing fees and any other loan preparation costs into a single fee. The portion of closing costs you pay as an origination fee depends on your lender and the size of your down payment. According to the FRB, you can expect an average cost of $2,734 with a down payment of 5 percent and about $2,537 with a down payment of 10 percent as of 2011.
- Origination fees are not directly tax deductible. However, depending on how your lender identifies these fees on closing documents, origination fees, as well as other closing costs, can reduce capital gains tax liability when selling your home. According to the IRS, if closing documents identify origination fees separately, such as on a closing or settlement statement, you can use them to increase the basis, which is the cost of your home. Increasing the cost of your home now can effectively decrease the amount of profit, which is the capital gain you realize when selling your home, and decrease any potential tax liability.
- If your closing documents include origination points, you will not be able to deduct their cost now or use them to your benefit in the future. Origination points, also called an origination fee, equals 1 percent of the total amount of your home loan. In this form, your lender lumps all closing costs into a single summary charge, rather than itemizing them on a settlement statement.
- It is important to distinguish between origination points and discount points, as these are not the same in the eyes of the IRS. Lenders commonly offer discount point options as a way of reducing, or buying down the interest rate on your loan. In contrast to origination points, the IRS views discount points as prepaid interest and, depending on how you qualify, allows you to take a direct tax deduction on the amount you pay either in the year you purchase your home or over the term of the loan.
