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So, you bought a house. Like most people, you are probably confused about how to pay off all those closing costs on your tax return. As you probably know, these costs are split between you and the seller based on the sales contract, local custom, or the understanding of the parties. If you built your home, you probably paid these costs when you bought the land or paid your mortgage.
The only liquidation or closing costs for your primary residence that you can deduct are home mortgage interest and property taxes. Both are not closing costs technically, but you paid them at closing. You deduct them in the year you buy your home if you itemize your deductions.
What about the other closing costs? These include all those dreaded “fees” they charge you; closing fees, title fees, HOA fees, etc. The bad news is that they are NOT tax deductible. These fees are basically the expenses you paid to buy your home.
However, they add to the tax base of your home. The following are items that you can add to the foundation of your home:
* Abstract fees (title summary fees).
* Charges for installing utilities.
* Legal fees (including fees for the title search and the preparation of the contract of sale and deed).
* Recording fees.
* Surveys.
* Tax transfer.
* Property title insurance.
* Any amounts owed by the seller that you agree to pay, such as back taxes or interest, registration or mortgage fees, repair or improvement costs, and sales commissions.
You will see the tax benefits of the above charges once you sell your primary residence. At that point, you will take your purchase price and add the above costs to your tax base to determine the profit or loss on the sale of your home.
Other closing costs that are deductible include points and prorated property taxes. Information on prorated property taxes can be found at www.real-estate-owner.com/1031-exchange. You can get information about points at www.real-estate-owner.com/points.
There are items that the IRS does not allow you to deduct as closing costs. Here are examples of closing costs that you cannot deduct or adjust at all to your tax base:
1. Fire insurance premiums.
2. Charges for the use of utilities or other services related to the occupation of the house before closing.
3. Rent for occupying the house before closing.
4. Charges related to obtaining or refinancing a home loan, such as:
to. FHA or other mortgage insurance premiums and VA financing fees,
B. Loan assumption rates,
vs. Cost of a credit report and
D. Appraisal fee required by a lender.