Settlement costs, or closing costs, are the costs associated with purchasing a home and are a list of the charges for each of the transactions involved. Are settlement charges tax deductible? Yes, some of the fees listed on the settlement statement can be claimed as a deduction when you file your personal income tax return with the Internal Revenue Service (IRS) at the end of each tax year. These costs include appraisal fees, prorated property taxes and interest, inspection fees, and homeowner association fees. This may not be an inclusive list of all settlement costs. You will need to review yours with your tax preparer if you are unsure about which expense you can claim.
You can look at the form titled HUD-1 that your settlement agent will give you when you close on your real estate. You will find a list of the escrow and title fees, loan lender points and interest, prorated taxes and other fees. On HUD-1 buyers can write off the taxes paid that are listed on page 1, lines 106 and 107 and page 2, line 1004. These are listed as deductibles on IRS Form 1040, Schedule A, line 6. HUD-1, line 801 lists the origination fees, or points, and this figure can be listed on Schedule A, line 10. HUD-1 interest expense is listed on line 901 and will be entered on line 11, Schedule A.
If you are the seller, you can deduct the property taxes that you paid as a pro-rated part of the closing costs. The real estate sold must be your principal residence. On HUD-1 page 1, line 406 and line 407 and page 2, line 1004, the taxes paid by the seller are listed. These are to be listed on Schedule A by the seller for an IRS deduction.
As a purchaser of a home you should keep a list of all the other fees that you paid, even if they were not used as a deductible on your personal income tax return. When you sell the property you may be able to list them as part of the cost basis of the home and reduce the tax liability on the gain from the sale of the home. This profit is called capital gains by the IRS and you will pay tax on the amount of profit when you sell. Escrow fees, title insurance fees, termite inspection fees, appraisal fees, and homeowner’s association fees are all examples of expenses that can be used to increase the cost basis of the home.
The cost basis of the home is the amount you paid for the home plus all the fees you paid in acquiring the real estate. For example: If you paid $100,000 for a home and paid fees of $5,000 that were not included in the deductibles your first tax year, then the cost basis of your home is $105,000 for IRS tax purposes. The profit on the sale of the home will be reduced by this $5,000 that is added to the cost basis of the home. When you prepare your taxes or you have a professional prepare your taxes, HUD-1 should be kept with a copy of the filed return as proof of the deductibles taken or the cost basis of the home. The IRS will only accept the certified original of HUD-1 when auditing your taxes. ‘Are settlement charges tax deductible?’ is answered, yes; part of the fees can be deducted whether you are the seller or the buyer of the real estate.