Q. In October of last year, I purchased a condominium in Montgomery County. I would like to know if four of the items listed on the settlement sheet are deductible for income tax purpose. The first three items are th Montgomery County transfer tax the State of Maryland transfer tax and the State of Maryland recordation tax. These three items alone cost me almost 2 percent of my entire purchase price.

The fourth item is the loan origination fee, which in my case was one percent of the loan amount.

Can I deduct any or all of these items on this year's tax return?

A. I am assuming that you are living in your condominium unit as your personal and principal residence. Thus, this discussion will be limited to residential tax benefits, and will not include any analysis of investment property.

Generally speaking, the only items deductible for tax purpose on a year-to-year basis are interest payments and real estate property taxes. The settlement sheet which you received when you closed on your condominium is a very import document, and should be kept in a safe place. You will find that a number of items are deductible this year. Equally important when you ultimately sell your condominium unit, however, is that many of the items which unfortunately are not deductible this year can be used to lower the profit which you no doubt will make on the sale.

Let's go over the settlement sheet as carefully as possible.When you settled in October, your seller already had prepaid the taxes of July 1, 1978, through June 30, 1979. At settlement in October, you reimbursed the seller for the portion of taxes from the date of settlement through June 30.

Don't forget to deduct that item as a real estate tax on this year's return. The settlement sheet is the only place that this item will be found, and you should take advantage of the tax deductions.

Another deductible item is interest which you pay on loans. Generally speaking, if you are dealing with a commercial mortgage lender, you will receive a summary at the end of the year indicating your current mortgage balance, as well as all of the interest payments for the previous year. These interest payments are completely deductible for tax purposes, and should be reflected on this year's tax return.

The question of the so-called loan origination fee is a very gray area. According to the Internal Revenue Service, if you have to pay points-a percentage of your loan-the amount paid is deductible as interest "if the payment of the charge is compensation solely for the use or forebearance of money." In simple English, if it is a true interest payment, it is deductible, but if it is compensation for a specific service that the lender performs on your behalf, it is not deductible as interest.

My own rule of thumb is to take the interest deduction for the loan origination fee. Last year, money was tight and the usury ceiling made it necessary for most mortgage lenders to charge points to get around the usury laws. Clearly, a good argument can be made that the points paid were really another from the interest, i.e., forebearance of money.

How many points can you deduct? According to the Internal Revenue Service, you can deduct all interest-related points if the fee charged was an established business practice in the area and "did not exceed the amount generally charged in the area." Clearly, you are not in the mortgage business, and have no real way of determining what is and what is not reasonable and customary in your area. Thus, although I know the IRS will not be too happy with these suggestion, I recommend that you take the deduction this year if you paid points.

If worse comes to worse and you are audited and cannot prove the legitimacy of the deduction, you will have to make up the difference, with a penalty.

Finally, to answer your question about the deductibility of the transfer and recordation costs: These items are specifically non-deductible. However, they will be used to raise the basis of your apartment when you go to sell it, thereby reducing your overall profit.