Are Settlement Charges Tax-Deductible?
- As a buyer you may be able to take certain settlement charges, paid as part of closing on a principal residence, as itemized deductions on your personal income tax return. These include property taxes paid in the settlement as listed on Page 1 Lines 106 and 107, as well as on Line 1004 Page 2 on the HUD-1. These are deducted on Schedule A Line 6. Loan origination fees, also called "points," are listed on line 801 of the HUD-1 and deducted on Line 10 of Schedule A. Interest expense appears on Line 901 of the HUD-1 and is deducted on Line 11 of your Schedule A.
- If you are a seller, you can deduct property taxes that you paid at closing, if the sale is your principal residence. The taxes paid are listed on the Page 1 of the HUD-1 on Line 406 and 407 and on Page 2 Line 1004. You'll add the total of these lines and then deduct this total on your schedule A Line 6.
- You should keep track of all other charges besides interest, points and property taxes because these fees can be used to offset any gain you might have when you sell the property. Other fees include escrow and title insurance costs as well as homeowners insurance fees and fees paid to outside vendors such as termite inspection companies or third-party property inspectors.You can add these fees to the "cost" of your property, so that when you sell it, your gain will be reduced. For example, assume you paid $100,000 for a home and had $5,000 in non-deductible settlement charges in the transaction. You can add these charges to the original cost so that your basis for gain will be $105,000 not $100,000.
- When you buy or sell a home, you should provide your tax professional with a copy of the certified final HUD-1 statement so that he can take all applicable deductions shown on the statement. You should also keep the HUD-1 statement for future reference when selling the home. In audit, the Internal Revenue Service will usually ask for a copy of the certified final HUD-1 when verifying your deductions.
