Origination Fees

[Earl]

HUD 1 Statement shows

801. Our origination charge Includes Origination Point (0.5000% or $622) $ 1,944.00
802. Your credit or charge (points) for the specific interest rate chosen -622.00
803. Your adjusted origination charges 1,322.00


Can anyone tell me what is deductible as loan origination/points on return.
Form 1098 shows $622 as points

[Burke]

There are no points charged. The discounted figure is the origination charge, which is not deductible.

[smithtax]

Origination Fees are Points

However, the net origination charges are deductible.

Prepaid interest is interest that a taxpayer pays in advance for a period that goes beyond the end of the tax year. A cash method taxpayer generally cannot take a current deduction for prepaid interest; rather, the taxpayer generally must spread this interest over the tax years to which it is allocable (Code Sec. 461(g)(1)).

Points are certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. A borrower is treated as paying any points that a home seller pays for the borrower's mortgage (Rev. Proc. 94-27).

Because points are prepaid interest, they generally are deductible ratably over the life (term) of the mortgage (Code Sec. 461(g)(1)). However, a cash method taxpayer can choose to fully deduct the points paid on a loan incurred to buy or improve the taxpayer's principal residence in the year paid (or deduct them over the life of the loan) if:

(1) the loan is secured by the taxpayer's principal residence;

(2) paying points is an established business practice in the area where the loan was made; and

(3) the points paid were not more than the points generally charged in that area (Code Sec. 461(g)(2)).



Pub 936

The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.


See also Rev Proc 94-27

[Burke]

Points are a percentage of the loan, which can then be called prepaid interest. You can tell if you have the HUD-1 whether the points are calculated as such. Origination fees are most of the time, just that -- flat fees for processing the paperwork. In the figures included in the OP, it was specifically indicated that $622 were the points included in the origination fee. Which were then credited for the full amount so designated.

[smithtax]

I offer my apologies and should clarify my remarks. The net origination charges are indeed not deductible; however the points charged are allowed as a deduction. In my previous post I mistakenly assumed the origination charges were a loan origination fee, which are regarded as prepaid interest and would be fully deductible.

If the points were incurred to buy or improve the taxpayer's residence, then fully deductible. If incurred as a result of a refinance, then deduct ratably over the length of the loan.

The following are line instructions to complete the HUD-1, describing the content of each line:

Line 801 is used to record the fee charged by the Lender for processing or originating the loan. If this fee is computed as a percentage of the loan amount, enter the percentage in the blank indicated.

Line 802 is used to record the loan discount or ``points'' charged by the Lender, and, if it is computed as a percentage of the loan amount, enter the percentage in the blank indicated.

Line 803 is used for appraisal fees if there is a separate charge for the appraisal. Appraisal fees for HUD and VA loans are also included on Line 803.

http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_23688.pdf

[S T]

Orginiation Fee, Points, Discount Points - all just "real estate jargon" and depending on the Closing Stmt how it is represented.

All mean usually the same - charge based on a percentage of the loan, and then might or possibly could meet the criteria as outlined in Pub 530.

One can "google" origination fees vs points and read the explanations. One also has to look to the State Requirements as what needs to be represented by State Regulations on the HUD -1 statement.

Sandy

[KBTS]

I have a similar situation. The HUD-1 statement shows

801. Our origination charge $7,181.00
802. Your credit or charge (points) for the specific interest rate chosen ($5,590.87)
803. Your adjusted origination charges $1,590.13

However, the 1098 shows total points paid as $7,106 - which does not match anything on the HUD-1. Since there is a credit on line 802 which reduces the charges, I am guessing this means that the buyer chose to not pay points to lower their rate. If this is the case, then it looks like the adjusted charges are just processing fees which are not deductible and that the 1098 points amount is incorrect.

[Gary2]

Orginiation Fee, Points, Discount Points - all just "real estate jargon" and depending on the Closing Stmt how it is represented.

All mean usually the same - charge based on a percentage of the loan, and then might or possibly could meet the criteria as outlined in Pub 530.

One can "google" origination fees vs points and read the explanations. One also has to look to the State Requirements as what needs to be represented by State Regulations on the HUD -1 statement.

Isn't it clear from the examples given here that "origination charges" tend to be a combination of fees based on a percentage of the loan (deductible for personal residence) and fixed application fees (not deductible for personal residence, amortizable with other origination charges for business/rental)?

[Burke]

I offer my apologies and should clarify my remarks. The net origination charges are indeed not deductible; however the points charged are allowed as a deduction. In my previous post I mistakenly assumed the origination charges were a loan origination fee, which are regarded as prepaid interest and would be fully deductible.

I agree, generally, with what you are saying, but in this case and in nearly every one I have seen this year, the points were "credited" or subtracted from the origination fee, so there is no deduction, as they were not paid. This is apparently common practice now for the lenders, for what purpose, I do not know. Not sure what the reference to appraisal fees was, except for general information, as these are not deductible either. They are capitalized with other closing costs to the basis of the property.

[Burke]

Isn't it clear from the examples given here that "origination charges" tend to be a combination of fees based on a percentage of the loan (deductible for personal residence) and fixed application fees (not deductible for personal residence, amortizable with other origination charges for business/rental)?

That is how I have been interpreting the HUD-1 information. Sometimes you have to do a little review or calculation instead of just accepting the figure as deductible interest. Lenders have become most creative in determining fees to charge.

[JohnH]

Lenders have become most creative in determining fees to charge.

How true.
Someday I expect to see a "Fees Fee" on a HUD-1.
That will be the fee they charge for expending the effort to conjure up names for new fees (or old ones).

[Burke]

I love the "tax fee." Whether or not they issue a 1099-S.

[Gary2]

I agree, generally, with what you are saying, but in this case and in nearly every one I have seen this year, the points were "credited" or subtracted from the origination fee, so there is no deduction, as they were not paid.

I agree with that interpretation, but I've never actually seen one. My first thought would be to look for the points being charged elsewhere, as it doesn't make sense to simply reduce the origination fee in exchange for a lower interest rate, which is typically the reason for paying points. Otherwise, why not just charge the lower origination fee to begin with?

[JohnH]

Back in December, I sold an inherited property and they handed me the 1099-S at the closing. Sure enough, right there on the HUD-1 was the "Tax Fee". My wife asked me what it was, and I explained that this was what they charged the buyer to hand us this piece of paper. The paralegal handling the closing wasn't amused.

Which makes em think of something. Why don't we charge clients a "Tax Fee" for giving them a copy of their tax return, and an "Invoice Fee" for printing their invoice?

[Burke]

I agree with that interpretation, but I've never actually seen one. My first thought would be to look for the points being charged elsewhere, as it doesn't make sense to simply reduce the origination fee in exchange for a lower interest rate, which is typically the reason for paying points. Otherwise, why not just charge the lower origination fee to begin with?

I agree 100%. But on the ones I have reviewed, they are not shown anywhere else. My first thought is it is a PR move to show the client what good guys they are being. Or it has something to do with their internal books. Banks are real creative when it comes to those as well, we have found. Like bumping up the sales price with some arcane adjustment on the HUD-1 to qualify for all those loans they used to offer at 100% or 125% of FMV. I am sure there is a reason somewhere.