Now that the housing market is starting to buck up again, I’m getting that question more and more. I figured it was time to spell it out in a blog post.
In general, the big tax deductions that go with home ownership are going to be your mortgage interest expense and your real estate taxes. Now, if you’re a first time homebuyer and you buy your home late in the year, you might not have paid enough interest or taxes to exceed your standard deduction for the first year. Don’t worry, you’ll see the benefits of home ownership on your taxes the next year.
When you’re looking at your closing costs, those figures are going to be on your HUD settlement statement. Here’s a link to a blank one so that you can see what that paperwork looks like: http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf
Here’s the deductibility status of closing costs:
Real estate taxes: Deductible beginning on the date of sale (lines 106 and 107.)
Assessments: Condo fees and Homeowner’s association fees: Not Deductible.
Commission: Increases the basis (so when you sell the home, your profit is reduced.) This probably doesn’t affect most people, but it’s still good to know. Increasing the basis comes in handy for when you’re claiming a home office, converting a property to a rental, or if you sell it for more than homeowner‘s gain exclusion. Currently you can sell your home for a $250,000 ($500,000 if married filing jointly) profit and pay no capital gain on it. Bottom line, you can’t deduct the commission you pay to your realtor, but you do want to know that number because it can come in handy later.
Loan origination fee, loan discount (points): Deductible (including the amount paid by the seller—if any.)
Items payable in connection with loan: appraisal fee, credit report, inspections, etc.: Not Deductible.
Interest: Deductible beginning on the date of sale—but that’s usually included on the Form 1098 that you get from your bank so you usually don’t have to take it off of the settlement statement.
Items required by lender to be paid in advance like mortgage insurance premium, hazard insurance, flood insurance: Not Deductible.
Reserves deposited with the lender such as hazard insurance, real estate taxes etc: Not Deductible. These are the items on lines 1002 – 1004. These real estate taxes are your escrow and not an actual tax paid, that’s why it isn’t deductible. Later, when the real estate tax is actually paid, then it will become deductible. This is probably the most confusing one on the list. Although you’re paying a real estate tax—the real estate tax isn’t actually getting paid—it’s just going into escrow. The tax usually gets paid once or twice a year. When the bank sends the money to the taxing agency—that’s when it’s considered to be paid. So, taxes with a line number in the hundreds—you deduct, taxes with a line number in the thousands, you don’t deduct.
Items payable in connection with title charges (Settlement or closing fee, abstract or title search, title examination, notary fees, attorney’s fees, etc): Increase Basis but Not Deductible.
Government recording and transfer charges, recording fees, tax stamps: Increase Basis
Additional settlement charges (survey, pest and other inspections): Increase basis but not deductible.
The bottom line is you might not receive any benefit from your closing costs on your tax return. (Remember, your itemized deductions need to be more than your standard deduction for itemizing to be worth your while.) But, if you do get to itemize, you need to know what to look for. There’s no sense in wasting a deduction that you’re entitled to if it’s going to help.