How to Amortize Loan Origination Fees for Tax Purposes

To amortize loan origination fees, you spread the fee across the life of the loan and deduct a portion each year, using straight-line amortization if the fee qualifies as de minimis and the constant-yield method if it doesn’t. The IRS treats these fees as prepaid interest under Section 461(g), which is why a single closing charge becomes a multi-year deduction rather than a current expense.¹ The mechanics below cover how to run the calculation, where to report the deduction, and how to correct the amortization if you didn’t set it up right the first time.

What Qualifies as an Origination Fee

For the amortization rules to apply, the charge must be solely for the use of borrowed money. Loan origination fees, maximum loan charges, discount points, and premium charges all fall under this category, whether expressed as “points” (one point equals one percent of the loan) or a flat dollar amount.²

Third-party costs such as appraisals, title searches, and recording fees are not origination fees. Those get added to the property’s basis or capitalized separately, and they follow different rules.

Picking the Right Amortization Method

Start with the de minimis test. If the original issue discount (OID) created by your fee is less than 0.25% of the loan’s face amount multiplied by the number of full years in the loan term, you can use straight-line amortization.² For a $400,000 loan on a 30-year term, the de minimis ceiling is $30,000 (0.0025 × $400,000 × 30). A typical 1% origination fee of $4,000 sits far below that limit, so most conventional business and rental property loans qualify for the simpler method.

Straight-Line Amortization

Divide the fee evenly across each year of the loan. A $6,000 origination fee on a 15-year loan gives you $400 of deduction per year for 15 years. Track the unamortized balance in your records so you know what’s left if you refinance or sell.

Constant-Yield Method

If your fee produces OID above the de minimis threshold, which can happen with large fees on shorter-term loans, you have to use the constant-yield method. Multiply the loan’s adjusted issue price (proceeds minus points) by the yield to maturity, then subtract the stated interest paid during that period. What’s left is your deductible OID for the year.² The deduction starts slightly smaller and grows each year. Tax software handles the arithmetic; you’re mainly responsible for keeping the schedule.³

Points on a Home Purchase Are Different

One class of fee escapes amortization entirely. Points paid on a loan used to buy, build, or improve your main home can be deducted in full in the year paid, provided all of these conditions hold:⁴

The loan is for purchasing, building, or improving the home you live in most of the time.
Charging points is an established local practice, and the amount doesn’t exceed what’s generally charged in your area.
You bring cash to closing at least equal to the points. Points paid with money borrowed from the lender don’t count.
The points are clearly identified as such on your closing disclosure.

Miss any of these, and you amortize over the life of the loan like everyone else.

Refinances and Second Homes

Points on a refinance of your main home do not qualify for the immediate deduction, even though it’s still your primary residence. You deduct them ratably over the term of the new loan.⁴ A $3,000 fee on a 30-year refinance produces a $100 annual deduction. The same ratable treatment applies to points on any loan secured by a second home or vacation property.

There’s a useful wrinkle when you refinance. If you still have unamortized points from the loan you’re paying off, the remaining balance generally becomes deductible in the year the old loan is satisfied, because the debt instrument no longer exists to spread the cost against.

Paying Off the Loan Early

If you sell the property or pay off the loan before the term ends, the unamortized origination fees are generally deductible in the year the loan ends. Refinancing with a new lender usually produces the same result.

Refinancing with the same lender is trickier. Whether the old unamortized balance accelerates depends on whether the new loan is treated as “sufficiently different” from the old one. If the transaction looks more like a modification of the existing debt than a genuinely new obligation, the IRS may require you to roll the old unamortized balance into the new loan and continue amortizing over the new term. This turns on facts, and it has been litigated. Before claiming a full acceleration on a same-lender refinance, get a tax professional to look at the numbers.

Where to Report the Deduction Each Year

The reporting mechanics change between year one and later years, and they depend on how you use the loan proceeds.

In the first year of amortization, complete Part VI of Form 4562 (Depreciation and Amortization) and attach it to your return. This puts the schedule on record with the IRS.²
In later years, if you have no new amortizable items starting that year, you don’t need Form 4562 solely for this purpose. Enter the annual deduction on the “Other deduction” or “Other expense” line of your return.²
For rental property, report the annual amount on the mortgage interest lines (line 12 or 13) of Schedule E, because the IRS treats the fee as interest.⁵
For a sole proprietorship, report the amount on the interest or other expenses line of Schedule C.

Keep a running amortization schedule regardless of which form receives the deduction. You’ll need the unamortized balance if you refinance, sell, or pay the loan off ahead of schedule.

Fixing an Origination Fee You Handled Wrong

If prior returns either expensed the whole fee in year one or missed the annual amortization entirely, amending old returns isn’t the fix. The IRS treats the correction as a change in accounting method, which means filing Form 3115 (Application for Change in Accounting Method).⁶

Many origination-fee corrections qualify under the automatic change procedures, which don’t require advance IRS approval or a user fee. You file Form 3115 with your current-year return and compute a Section 481(a) adjustment reflecting the cumulative difference between what you deducted and what you should have deducted. Situations that don’t fit the automatic list go through the non-automatic procedure, which involves a user fee and IRS review.⁶

Penalty Exposure

Expensing fees that should have been amortized can produce an accuracy-related penalty under Section 6662, at 20% of the underpayment attributable to negligence or disregard of the rules. The same 20% rate applies to a substantial understatement, defined as an understatement exceeding the greater of 10% of the tax due or $5,000.⁷

You can avoid the penalty by showing reasonable cause and good faith, such as reliance on professional advice. Not knowing the rule isn’t usually enough by itself.⁸ Setting up the amortization correctly at closing is cheaper than defending it later, and correcting through Form 3115 is cheaper than waiting for an examiner to find the error.

1
Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction
2
Internal Revenue Service. Publication 535 – Business Expenses
3
eCFR. 26 CFR 1.446-5 – Debt Issuance Costs
4
Internal Revenue Service. Topic No. 504, Home Mortgage Points
5
Internal Revenue Service. Instructions for Schedule E (Form 1040)
6
Internal Revenue Service. Instructions for Form 3115
7
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
8
Internal Revenue Service. Accuracy-Related Penalty