USDA Loan Guarantee Fee Deduction: Tax Benefits Explained

There are two types of USDA guarantee fees, both of which can be deducted from your taxes. You can find the amount your USDA lender charged in upfront and annual fees in box 4 of IRS form 1098. The upfront guarantee fee you paid on a rural residence is treated as qualified mortgage insurance for federal income tax deduction purposes. The annual premium is treated as qualified mortgage interest.

Writing Off the Upfront Fee

The USDA charges 2 percent of the loan amount at closing to guarantee your mortgage for the lender. The USDA's guarantee provides an added measure of security for a lender, making the no-down-payment loan possible. Borrowers can either pay the upfront guarantee fee out of pocket at closing or finance it by adding the fee to the mortgage balance. Most choose the latter option. Even when financed, the full guarantee fee is deductible for the year in which you close.

Deducting the Annual Fee

The annual fee the USDA charges is 0.40 percent of the remaining loan balance every year. Annual amounts paid toward the guarantee can be written off for the year in which they are allocated.