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by Michael Lodge
Every year tax clients buy and sell homes. Some are personal homes and some are rental homes. I have already addressed rental property so today we are going to discuss your personal home that you are buying or selling and what is tax deductible on your tax return.
First issue is that you have to understand that you can only deduct home closing costs, settlement fees, if you itemize your deductions on an IRS form 1040. If you file a short form return you will not be able to take advantage to these deductions. So you have to itemize.
So what types of home closing expenses can you deduct? Home closing costs are various depending on the type of home you are buying, the type of loan you are getting, The standard form used in all real estate transactions is called a HUD-1 Settlement Statement. This form lists all of the settlement expenses paid by the borrower and the seller. You will need to keep a copy of the HUD-1 in your tax records because your tax accountant is going to need that information from the form.
POINTS – One of the settlement charges are points. What are points? Points is pre-paid interest and you pay them because lenders probably gave you a lower interest rate on the loan in exchange for the prepaying some of the interest. Pints allow you to purchase a lower interest rate on your loan. You will see them on the HUD-1, you may see it described as loan origination fee, loan discount, or discount points. And sometimes it even says points.
PROPERTY TAXES – On the HUD-1 you will see a settlement charge that is for real estate property taxes. These taxes are assessed and collected by the county or other taxing agency every year. Property owners only pay property taxes once each year, so there is a good chance the seller paid for your portion beginning with the date of closing until the next property tax billing cycle. Making up the difference HUD-1 settlement statement most of the time reflects a property tax payment or prepayment, and those taxes are deductible as an itemized deduction..
PREPAID INTEREST – Points and prepaid interest sound very close to being the same, they are listed separately on the HUD-1 settlement statement. Points are prepaid interest over the life of the loan, while “prepaid interest” refers to the interest just for the first partial-month of your loan. This prepaid interest is tax deductible if you are itemizing your tax return.
PRIVATE MORTGAGE INSURANCE COSTS – If prepaid, only the amount allocable to this year based on an 84 month amortization.
Title fees, real estate commissions, appraisal costs, home inspections, documentary stamps, credit report costs, costs of an abstract transfer taxes, flood certificate, attorney fees, etc are not deductible, but are added to the cost of the property.
More reading go to the IRS publication: https://www.irs.gov/pub/irs-pdf/p530.pdf
If you have any tax questions please submit them to: firstname.lastname@example.org