After refinancing a home, how do I treat the remainder of the original VA funding fee which I started to deduct on an 84 month basis?

[Anonymous]

When I purchased my home, which I rent a portion out, I paid a VA funding fee. I began treating and deducting the VA funding fee as PMI on an 84 month basis. This past year I refinanced my home and as a result the original loan no longer exists. Do I continue deducting the fee based on that same 84 month basis, or is it retired and I can go ahead and deduct the remainder of it essentially being a loss? Since I rent a portion of a home a portion would be a business (rental) and personal expense...

[Opus 17 · Accepted solution]

When did you buy the home?  Because the VA funding fee is a special category of mortgage insurance that is fully deductible in the year you close.  If it was 2013 or later, you could amend your prior tax returns to deduct the entire amount in year one and then remove the deduction in subsequent years.  (It is too late to amend a 2012 or earlier tax return to get an additional refund.)

Unfortunately, if you are amortizing the premium deduction and you pay off a loan early, such as by refinancing, you can't deduct the remaining balance.

[TaxGuyBill]

I was trying to figure out this scenario:  What if the OP didn't actually PAY anything (including the VA funding fee) in the year he bought the home?  For example, he bought the home in December and paid $0 down payment.  Would the VA funding fee still be fully deductible that year, or would it be amortized?

[Opus 17]

How often can someone buy a house and pay absolutely nothing including closing costs?  I would say that as long as the taxpayer brings resources to the closing that are at least to the VA funding fee (cash to close, or equity in a prior home), then the fee is fully deductible .  Even if the buyer financed everything 100% including closing costs, I would consider an argument that the VA funding fee to be fully deductible because it is covered by different rules than other PMI and because any loan in the borrowers name counts as money the borrower provides as long as it has to be paid back. (In contrast to the rule about points where points are only deductible if the buyer brings cash that is greater than the points -- although the points rule is a good counter-example that the VA funding fee might not be deductible if the buyer brings zero resources to the table.)

[TaxGuyBill]

That was my reasoning too.   🙂

[Anonymous]

Thanks. This was all very helpful!