The Federal government encourages homeownership by making certain parts of owning a home tax deductible. The most common deduction is the amount of interest paid on your mortgage each year. Additionally, some of the closing costs may also be deductible depending upon how they are paid, charged and disclosed. As with most things related to your taxes, you should always consult with a CPA or tax professional before taking any deduction you’re not certain you qualify to take.
Mortgage Broker Fee
If the fee is labeled as a mortgage broker fee, then it is likely not deductible. Some mortgage brokers charge a flat rate mortgage broker fee as part of their cost for obtaining you a loan. The IRS allows homeowners to deduct interest and prepaid interest from their taxes. As of 2011, the IRS has not defined the mortgage broker fee as prepaid interest making it ineligible for deduction. However, there are other fees charged by your mortgage broker that may be deductible.
In the mortgage business one point is equal to one percent of the loan amount. Many mortgage brokers charge origination and discount points on their mortgages. The Internal Revenue Service defines these points as prepaid interest. Because of this, they are tax deductible. Rolls and limitations apply to these deductions and not everybody will be eligible for the full deduction.
The points must have been charged while obtaining a mortgage for your primary home. The paying of points must be an established business practice in your market. The points cannot be more than what is generally paid in your market either. The points cannot be used to pay for other items normally not paid with points, such as appraisal inspections, property reports or title insurance. You must pay for these points, you cannot write off points paid for by the seller of the home. You cannot borrow the money to pay for the points; if you refinanced your home and included the closing costs in your loan, you may not qualify for this deduction. The points must also be reflected on your settlement statement as a percentage of the loan amount.
When to Write Them Off
If the loan was used to purchase or build your home, then you may write them off in the same year. If the points are because of a refinance, you must deduct them over the life of a loan. If your new refinance loan is a 30-year mortgage, then you deduct a 30th of the points each year on your taxes.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.