Are Closing Costs Tax Deductible?
Did you know that some closing costs are tax deductible? As the year is drawing to a close, it’s time to think about your taxes. The reality that many buyers are unaware of is that purchasing a house can give you some tax advantages in the year that the purchase is made. Happily, this may provide you with an extra incentive to close on a home purchase before the end of the year or give you additional financial flexibility when choosing the property that’s right for you. Here’s a closer look at what prospective buyers need to know.
It’s important to keep in mind that only buyers who file their tax returns with an itemized IRS form 1040 are able to take these deductions. Tax payers who take the standard deduction and file a 1040EZ are unable to claim the benefits, for example. If you have any questions about whether your closing costs will be tax deductible, it’s always wise to consult a tax professional.
In most real estate transactions, buyers are provided a copy of a form called the HUD-1. The HUD-1 is a list of all your settlement costs or closing costs. Not only will this help you or your accountant determine what items you may be eligible to deduct, but it’s important backup data in case the IRS has any questions on your filing.
One area to look at for tax deduction is pre-paid interest on the life of your mortgage. Sometimes these are called points or even a loan origination fee. By paying your lender interest upfront, you’re in essence purchasing a lower interest rate on your mortgage. Often, some or all of this amount may be deducted from your taxes.
Property taxes are often also an option for you to deduct. Since property taxes are typically paid once per year, the sellers have often prepaid the taxes for the year in which you’re purchasing your home. As a result, your settlement fees may include repaying them for a portion of the year’s property taxes. These taxes may be eligible to be listed as a deduction.
Monthly pre-paid interest
In addition to any points that you paid on your mortgage, review your settlement statement to see if you pre-paid any monthly interest on your mortgage. Often, when you purchase a home you’re required to pre-pay any interest generated in the month in question. So for example, if you purchase a home on the 15th of the month you will typically pre-pay any interest due from the 15th to the end of that month, before assuming your regular mortgage payments.
Are you interested in purchasing a home in the Las Vegas area? Contact Sydnee Johnson today to learn more about your financing options, and talk to your accountant about which closing costs are tax deductible.