- The Internal Revenue Service allows a mortgage lender to take a tax deduction for money he cannot collect, or a defaulted loan. To deduct the defaulted loan, the mortgage lender must have previously included the money in his income. There must also be proof that the money was given as a loan and not as a gift, and that there is no reasonable expectation that the money will ever be paid.
- Another tax deduction for mortgage lenders comes from cash and trade discounts. An example of a cash and trade discount is when a mortgage borrower pays an account within 10 days and then gets a 2 percent discount. This enables the mortgage lender to get his money faster and the borrower to pay a little less for paying early. Mortgage lenders can apply the money they are not receiving as a tax deduction.
- Interest on certain loans, investments and obligations can also be taken as a tax deduction by mortgage lenders. This deduction is only allowed when the taxpayer is engaged in some sort of financial business and the amount deducted was received because of a loan or investment. Only lending mortgage brokers qualify for this deduction and it can only be taken for the amount of the net origination fee and the interest actually paid on the loan.
- There are certain items that mortgage lenders cannot use as a deduction. One example is the cost of doing business, such as amounts paid to independent contractors for work done. Other items that cannot be deducted include interest on a second mortgage and interest on equity lines of credit that are subordinate to another loan. Finally, if the documentation does not exist to support a tax deduction, the mortgage lender cannot take it.
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