VA Funding Fee Now Tax-Deductible in 2026: What Veterans Need to Know
Starting in tax year 2026, the VA funding fee is now tax-deductible for eligible veterans, service members, and surviving spouses. This is a significant change that can save you money when you buy a home with a VA loan. As a U.S. Army veteran and REALTOR who has helped dozens of military families navigate VA home loans, I want to make sure every veteran knows about this new benefit.
Key Change at a Glance
What Changed
VA funding fee is now deductible as mortgage interest points on Schedule A
Effective Date
Tax year 2026 (returns filed in 2027)
Who Qualifies
Veterans, active-duty service members, and surviving spouses who itemize deductions
Maximum Benefit
Up to $8,000+ saved on a typical California home purchase, depending on loan amount and tax bracket
What Is the VA Funding Fee?
The VA funding fee is a one-time charge paid by veterans when using a VA-guaranteed home loan. It helps offset the cost of the VA loan program to taxpayers so that the benefit remains available for future generations of veterans. The fee ranges from:
- 2.15% of the loan amount for first-time use with zero down payment
- 3.30% for subsequent use with zero down payment
- Lower rates apply when making a down payment of 5% or more
- 0.50% for IRRRL (Interest Rate Reduction Refinance Loans)
On a $600,000 home in Santa Clarita or Southern California, a 2.15% funding fee amounts to $12,900. Previously, that was a non-deductible expense. Starting in 2026, it can be claimed as a deduction.
Real-World Example
A first-time veteran buyer purchasing a $700,000 home in Santa Clarita with a VA loan (0% down) would pay a funding fee of $15,050 (2.15%). At a 22% federal tax bracket, the deduction could save approximately $3,311 on their federal taxes. In a 24% bracket, the savings would be approximately $3,612. This is real money that stays in the veteran's pocket.
How the Deduction Works
The IRS treats the VA funding fee as prepaid interest or mortgage insurance points. To claim it, you must:
Itemize Your Deductions
Use Schedule A on Form 1040 instead of taking the standard deduction. You can only claim the funding fee deduction if you itemize.
Deduct in the Year You Paid
If you paid the funding fee upfront at closing, the entire amount may be deductible in the year of purchase. If it was rolled into the loan balance, only the portion paid during the tax year is eligible.
Check Income Limits
There are income phase-out limits that may apply depending on your filing status and adjusted gross income. Consult a tax professional for your specific situation.
Keep Your Closing Disclosure
Your VA funding fee will be listed on your Closing Disclosure (CD) from settlement. Save this document for your tax preparer.
Who Is Exempt from the VA Funding Fee?
Some veterans are already exempt from paying the funding fee entirely. If you qualify for an exemption, this new deduction may not apply since you are not paying the fee. Exemptions include:
- Veterans receiving VA disability compensation
- Veterans rated as eligible for VA disability compensation but not yet receiving it due to active-duty status
- Surviving spouses receiving Dependency and Indemnity Compensation (DIC)
- Active-duty service members who have received the Purple Heart
- Certain surviving spouses of veterans who died in service or from a service-connected disability
If you are already exempt, you are not paying the funding fee, so there is nothing to deduct. But you are already ahead of the game with significant savings at closing. If you do not qualify for an exemption, this new deduction is a meaningful way to reduce your tax burden.
Why This Matters for Southern California Veterans
In markets like Santa Clarita, Los Angeles, Ventura, Riverside, and San Bernardino counties, home prices are higher than the national average. A larger purchase price means a larger VA funding fee — and a larger potential tax deduction.
The 2026 VA loan limit increased to $832,750 (baseline) and up to $1,249,125 in high-cost counties, meaning veterans have more buying power than ever. Combined with the new funding fee deduction, zero down payment option, and no PMI, the VA loan remains the single most powerful home financing tool available to veterans.
Veterans with partial entitlement can now also take advantage of these higher limits, opening up opportunities in more expensive markets throughout Southern California.
Other 2026 VA Loan Updates
The funding fee deduction is just one of several VA loan improvements in 2026. Here is the full picture for veterans considering homeownership this year:
- VA Funding Fee tax-deductible — New for tax year 2026
- Higher loan limits — $832,750 baseline, up to $1,249,125 in high-cost areas
- Partial Claim Program — New foreclosure prevention tool launched June 15, 2026
- Zero down payment remains available with no PMI required
“As a fellow veteran, I know that every dollar matters. The VA loan is one of the most valuable benefits we earn through our service, and the new funding fee deduction makes it even better. I help veterans across Southern California use their VA benefit to buy homes with confidence. Let's talk about what this means for you.”
Frequently Asked Questions
Can I deduct the VA funding fee from previous years?
No. The deduction applies only to tax year 2026 and forward. Prior tax years are not eligible.
Do I need to itemize to claim this deduction?
Yes. The VA funding fee is deductible on Schedule A as mortgage interest points. You must itemize rather than taking the standard deduction.
What if I rolled the funding fee into my loan balance?
If the fee was financed into your loan, only the amount paid during the tax year may be deductible. Consult a tax professional for guidance on your specific situation.
Does the deduction apply to IRRRL refinances?
Yes. The 0.50% IRRRL funding fee may also be deductible under the same rules for eligible veterans who itemize deductions.
Are there income limits for this deduction?
Income phase-out limits may apply based on your filing status and adjusted gross income, similar to other mortgage-related deductions. Check with your tax preparer.
Sources: Information in this article is drawn from VA.gov (news.va.gov), Military.com, Veterans United, VA Loan Network, MyMilitaryBenefits, and USMilitary.com — all published in 2026. The VA funding fee tax deduction was authorized under the VA Home Loan Program Reform Act and took effect for tax year 2026. Consult a qualified tax professional for advice specific to your situation. The VA funding fee rates listed are current as of August 2026 and are subject to change.
Sam Silver
U.S. Army Veteran · AI-Certified REALTOR · 22+ Years Experience
Equity Union Real Estate · CalDRE #01412755
Proudly serving veterans and families across Santa Clarita, Los Angeles, Ventura, Riverside, and San Bernardino counties.
Ready to Use Your VA Loan Benefit?
Whether you are a first-time homebuyer exploring VA loans, a veteran looking to refinance, or a military family relocating to Southern California — I can help you navigate the process with clarity, honesty, and the Service Before Self commitment you deserve.
CalDRE #01412755 · Equity Union Real Este · 661-621-5340 · Sam@SamSilverHomes.com