VA funding fee for a rental properity

[airforce_justin]

I purchased a rental property and was charged a VA funding fee. Since this isn't my primary residence can I deduct this? Where do I input it?

[californiasteven]

It is considered Mortgage Insurance.  So you can enter it under Mortgage Interest when you report the expenses of the rental.  This is assuming you rented it for part of 2016.

[californiasteven]

I just learned more and changed my answer.

[vikikavisal]

Do you amortize the VA funding fee over the life of the loan similar to mortgage points? This is the third year I've rented my property out and failed to include the fee as an expense on my tax return the first two years.

[GiseleD]

According to the VA, you need to live in the home that is purchased by the loan. Below is a snip from their Purchase Loan page:

Am I eligible for a VA-backed purchase loan?

You may be able to get a VA-backed purchase loan if you meet all of the requirements listed below.

All of these must be true. You:

• Qualify for a VA-backed home loan Certificate of Eligibility (COE), and
• Meet our—and your lender’s—standards for credit, income, and any other requirements, and
• Will live in the home you’re buying with the loan

Based on what I see on their site, the VA funding fee is part of a VA-backed home loan. The third bullet point says that you must live in the home. Since you are renting the home, I would recommend not deducting the VA funding fee without further reading the VA loan documents to see if there are any exceptions. 

@vikikavisal

[vikikavisal]

We did live in the home for 2 years (2015-2017), however due to receiving PCS orders we have been renting it out for the last 2 years (2017-2019). I’m curious if we can amortize the VA funding fee we paid when we purchased the house since we are now renting the home out?

[DMarkM1]

Yes, you can amortize the loan origination fees.  For more information see page 3, column 1 of Publication 551.  

"The following items are some settlement fees and closing costs you can't include in the basis of the property.

1. Casualty insurance premiums.

2. Rent for occupancy of the property before closing.

3. Charges for utilities or other services related to occupancy of the property before closing.

4. Charges connected with getting a loan.

The following are examples of these charges.

a. Points (discount points, loan origination fees).

b. Mortgage insurance premiums.

c. Loan assumption fees.

d. Cost of a credit report.

e. Fees for an appraisal required by a lender.

5. Fees for refinancing a mortgage.

If these costs relate to business property, items (1) through (3) are deductible as business expenses. Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan."

[Carl]

@californiasteven here's what I consider "the simplicity" of this.

 - Fees/charges associated with acquisition of the property are added to the costs basis of the property. For example, title transfer fees.

 - Fee/charges associated with acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan.

If your funding fee is label "MPI" or "PMI" then it's in box 5 of your 1098 Mortgage Interest Satement. After entering the 1098 in the program you have to select the option (if presented) that you'll deduct it over the life of the loan.

Otherwise, here's how to enter the total of all your loan acquisition fees.

 - In the assets/depreciation section select Add Another Asset.

 - Select Intangibles, Other Property and continue.

 - Select Amortization Intangibles, continue.

 - Call it loan fees or whatever in the description, the total cost, and the closing date of the loan. Doesn't matter that it was years ago either. Then continue.

 - Select Purchased new, then NO not always used 100% business, then "used for personal use first", then enter the date you converted the property to rental. Next, percentage of business use will be 100% (yes, one hundred precent) because it was one hundred percent business use "AFTER" you converted the property to rental. Then continue.

 - Your code section is 163: Loan Fees, continue.

 - Useful life is 27.5 and continue.

 - Feel free to review, then press on with life. 🙂

[MeinHausAutoBoot]

First-time rental owner here, renting out a home we had to leave that is financed with a VA loan, and wanting to make sure I get this right the first time.  Not seeing a code section reference in the instructions for Form 4562, Part VI for amortization, I dug to see the source for myself.  Thanks for the reference. 

However, by my reading of the applicable code section, VA loan funding fees are not eligible for amortization as a business expense, but PMI would be. Passes the sense check, since VA loans are intended for a primary residence you live in.

- See 26 USC Section 163(h)(4)(E&F)

- The key excerpt reads: "(F) Special rules for prepaid qualified mortgage insurance.  Any amount paid by the taxpayer for qualified mortgage insurance the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term." Fine so far, but it goes on to say :"... The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service."

Looks like I can't amortize the funding fee, which is the fee for prepaid mortgage insurance provided by the VA.  If I'm wrong, please explain.  I don't need the deduction right now, but want to claim it if I legitimately can be doing so.