Can I deduct the 1.5% origination fee on a construction loan (to build a primary res.) as points if they were paid by adding them to the loan balance rather than in cash?

[6891600_03402]

We took out a construction loan in 2017 to build a new primary residence that we will occupy by mid-2018.  We paid a 1.5% origination fee to the lender that is on our HUD statement but not our 1098.  However, we paid the origination fee by adding it to the loan, not in cash.  We didn't make a traditional down payment on the loan because we owned the land outright, so we didn't take any cash to closing.

Can I still deduct the origination fee as points?

[Opus 17 · Accepted solution]

Because you did not pay a cash downpayment that was at least as large as the points, you can't deduct them in 2017.  You can only deduct the points spread out over the life of the loan.

Note also that interest and points on a construction loan are only deductible if you complete construction within 2 years and covert the balance of the loan to a mortgage.  Otherwise, neither the interest nor points are considered deductible mortgage interest.