Is Origination Tax Deductible?
A loan origination fee is an additional charge that the lender adds to the loan when the lender sets up the loan. Loan origination fees are common with student loans and real estate mortgages. The lender adds the loan origination fee to the loan balance, so the borrower must pay interest on the loan origination fee. Some loan origination fees are deductible and others are not, depending on the type of the loan.
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Fee Reporting
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Some student loan lenders did not include the loan origination fee as part of the starting loan balance when they calculated interest expenses for the student. The requirement to report the loan origination fee on a student loan interest statement only applies to student loans made after September 2004, according to the IRS. The student can add the origination fee when reporting the amount of money paid for student loan interest.
Points
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Mortgage loan origination fees, or points, can be fully deductible. The Internal Revenue Service considers loan origination fees that the home seller pays as an interest expense for the home buyer, not the home seller. In some cases, points are not deductible or are partially deductible. When the mortgage term is longer than 30 years, the buyer can't deduct points. If the mortgage is more than $250,000, the buyer can deduct a maximum of six points if the mortgage is more than 15 years, and a maximum of four points if the mortgage has a shorter period.
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Deduction Period
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A home buyer can deduct the full value of the points in the same year as the loan if certain conditions apply, and otherwise deducts part of the origination fee each year during the period of the loan. For a student loan, the Internal Revenue Service allows a lot of flexibility in how the student can report the origination fee, so the student can take a large deduction in one year or spread out the deduction to gain tax benefits in several years.
Interest Statement
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A student loan lender must send the student Form 1098-E, the student loan interest statement, if the student borrows more than $600 from the lender. If the student takes out a smaller loan and does not receive a copy of this form from the lender, the student can still deduct the origination fee interest on a federal income tax return.
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