Home closing costs, often called settlement fees or settlement charges, are pricey, but they also come with significant tax advantages. Home buyers can typically deduct many, if not all, of the compensation charges for the tax year where they purchase the house. Tax deductible settlement charges include common fees like property tax, origination fees or points, and prepaid interestrates.
The very first thing to understand is that you can only deduct home closure costs, or settlement fees, if you itemize your deductions in an IRS form 1040. So, if you file a 1040EZ, for example, you won’t reap any tax advantages from your house closing costs. On a 1040, you may opt to maintain either the standard deduction or your itemized deductions. Settlement charges are a sort of deduction.
Home closing costs vary depending on the kind of property you purchase, the kind of loan, if any, you use, whether you use a realtor, and whether you use an independent mortgage broker. The standard form employed in nearly all real estate transactions is called a HUD-1 Settlement Statement. The HUD-1 lists each the settlement charges paid by the borrower and the seller. You have to keep a duplicate of the HUD-1 in your tax documents because a lot of the significant information is available on this form.
Many mortgage loans include a settlement charge for points. Factors are prepaid interest. The reason you pay points is that lenders will give you a lower rate of interest on the loan in exchange for you prepaying some of the interest. Essentially, points allow you to purchase a lower rate of interest on your loan. A few HUD-1 forms refer to points by a different title, like a loan origination fee, loan discount, or discount points. In rare circumstances you can not deduct the complete amount of the things in the year that you shut. However, the vast majority of the time it is possible to deduct the complete amount of things in the year that you close on your purchase.
Another common settlement charge is real estate real estate taxes. All these are taxes assessed and collected by the county or other taxing authority each year. As you are getting the owner of the property, you become liable for the property taxes. Property owners just pay land taxes once each year, so there is a good chance the seller has paid on your portion of property taxes starting with the date of closure until the following property tax billing cycle. To cover that gap, the HUD-1 Settlement Statement often reflects a property tax payment or prepayment, and those taxes are deductible as an itemized deduction your 1040 tax return.
Although points and prepaid interest sound like the same thing, they are often listed separately on the HUD-1 Settlement Statement. Points are prepaid interest over the life span of the loan, while”prepaid interest” refers to the interest solely for the very first partial-month of your loan. Most lenders require mortgage obligations by the first of each month, so, for example, if you close on the 15th of the month, you will prepay interest for the remaining 15 days in that month. This prepaid interest is tax deductible assuming, again, you itemize your deduction on a form 1040 tax return.