VA funding fee and other mortgage closing costs rolled into loan, is it home acquisition debt?

[rprastein]

I'm having a ton-o-fun with my 2019 home mortgage interest deduction calculations.  1098 forms for 5 different lenders over 3 years (purchase, 2 refi's, 2 loan sales) and the 2019 refi has points, so TT is already not being cooperative.  But I digress.  This question is about my original mortgage.

It's a 2018 VA mortgage, with the VA funding fee rolled into the loan, and I'm currently doing my 2019 taxes.  The loan was sold, twice actually, prior to my first mortgage payment.  Fortunately, there were no points or anything that needed to be spread over the course of the loan.  The VA funding fee is over $10,000 -- is it considered home acquisition debt?  It's 2.15% of the loan principal, do I need to decrease the interest reported on my 1098 Box 1 by 2.15% when I enter it into TurboTax? 

If I do, that means I did it wrong on my 2018 taxes, but I need to file a 1040X anyway, because I didn't know to deduct the VA funding fee itself.

Thanks,

Rebeccah

[Carl]

Without getting into all the particulars, yes, the VA funding fee that you paid is acquisition debt. (How you paid the fee doesn't matter.)  I'm assuming you know the particulars of how to deal with it, since it was rolled into the loan amount.

[rprastein]

Well, probably best to make no assumptions, but thank you for answering the acquisition debt question. That's one less complication to deal with, anyway.

For the deduction of the VA funding fee itself,   2018 Pub 936 was not updated when the Mortgage Insurance Duduction was extended retractively to 2018.  However,  2019 IRS Pub 936 says "These fees can be deducted fully in 2019 if the mortgage insurance contract was issued in 2019."  Plain reading of the paragraph would seem to indicate that "These fees" refers to "The [VA] funding fee and [RHS] guarantee fee" (from the previous sentence), which "can either be included in the amount of the loan or paid in full at the time of closing."   However, most google searches on the question claim that if the fee is added to the loan, then the deduction must be spread out over the life of the loan as it is with monthly mortgage insurance premiums.

Do you have any insight on which it should be?

Rebeccah

[Carl]

I just found by pure luck, the 2020 version of IRS Publication 936 at https://www.irs.gov/pub/irs-pdf/p936.pdf on page 7 seems to make it clear when you can deduct the fees in full the first year, and when you have to spread the deduction out over the life of the loan (not the MACRS life of the property.)

It also clarifies where the funding fee can come from (as part of the down payment for example).

If you use the FIGURE B on page 6, that tends to make it simpler I think, to know what path you should take.

 There's a specific way to enter this in TurboTax so it's done correctly. It's important to enter it correctly so that in the future when things change such as selling the property you can easily deduct the remaining amount left in the year of the change that allows for this without having to go around your elbow to get to your thumb to make it happen.

Please read through the section "Deductions allowed in year paid" which starts in the first column on page 7 and the bottom of that column. From what I see, there's really no reason I can find that item #6 under that section could not be applied, thus allowing you to fully deduct the points in the year you closed on the property. (That's the route I would take.)

[rprastein]

Thanks, Carl.

Page 7 and Figure B are about points, not about the VA funding fee.  Are they treated identically?  And actually, for my 2018 loan, I made a $4000 deposit (no downpayment) and the VA funding fee was $10,857.50, so no, by those rules I would not be able to deduct the whole thing in that year, only part of it, and there would be no avoiding reaching around my elbow to get to my thumb.  TurboTax does NOT make it easy to figure out how to enter information in these sorts of hybrid situations.

In 2019 I have to reach around my elbow AND my thumb to get to my big toe, because I refinanced, with points, rolled $13,000 in closing costs into the loan including another VA funding fee, and had major home improvement expenses.  And the refinanced loan was sold two weeks after closing.  And if I end up having to spread part of my 2018 VA funding fee across two years, then I need to add that into the mix, too.

The only saving grace in all of this is that without question, after 2019 all of my loan indebtedness is home acquisition debt, and I refinanced AGAIN in 2020 with no points and brought enough cash to close that my VA funding fee is covered and there is minimal increase in my loan principal.  Oh, and I now have a fabulously low interest rate.

[Carl]

Page 7 and Figure B are about points, not about the VA funding fee.

Apparently, you didn't read it all. Page 7 3rd column under "Special Situations", 2nd paragraph "Amounts Charged for Services", the second bullet statement.

Amounts charged by the lender for specific services connected to the loan aren't interest. Examples of these charges are

:•Appraisal fees,

•Department of Veterans Affairs (VA) funding fees

The way I see it, since the "Special Situations" section starts with the words, "This section describes certain special situations that may affect your deduction of points", the VA funding fee is considered to be included in the total points paid. Remember, points can be more than just prepaid interest. They can include origination fees, Maximum loan charges, etc. It's all treated as prepaid interest and is deductible accordingly.