What Can I Claim From My HUD Statement for Taxes?

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You’ve taken the plunge and you’ve bought your own home, and now you might be wondering if Uncle Sam is willing to give you a pat on the back for all that work and effort. In fact, the Internal Revenue Code does offer a few tax breaks for homeownership, and you can get in on them right from the start on the day you close.

The HUD statement you receive at settlement is your guide to how much you can claim on your tax return for certain deductions. This HUD statement for taxes details all the money that changed hands at closing, and what each dollar was spent on.

Tips

  • The HUD statement changed in 2015 and the Tax Cuts and Jobs Act tweaked some of the rules a little in 2018, but you can still claim tax deductions for mortgage interest, points and real estate taxes if you itemize.

Rules for Mortgage Interest and Points

Mortgage interest is tax deductible, and this includes points, sometimes called discount points, loan origination fees or maximum loan charges. This deduction includes the interest you pay all year as well as what you might pay at closing. Points are something like prepaid interest, so you can claim them.

Of course, this being taxes, there are some qualifying rules. You must use the funds from the mortgage to buy or build your home, and the points must be equal to a percentage of the amount you’re borrowing. They can’t be exorbitant – the percentage must be comparable to interest or points paid on other mortgages in your home’s area. You have to pay them out of pocket. You can’t roll them into your mortgage. They can’t represent payment for other fees, such as for water or trash removal, and they must be included on your HUD document for taxes.

Rules for Real Estate Taxes

You can also deduct your property taxes, including any you pay at closing and going forward into your time of ownership. If you don’t actually pay them at closing for some reason – and this is rare – they must be paid directly to your municipality or county tax authority at some point during the tax year. Taxes paid into an escrow account are permitted, but only after the escrowed funds have been remitted to the tax authority.

These taxes will also appear on your HUD form for taxes, at least the portion that's paid at closing. You’re entitled to claim a deduction for taxes that come due and are paid from the date of closing going forward, but not any that are paid for the period up to and including the date before closing. That’s the seller’s tax deduction.

And it doesn’t matter if the seller actually pays the taxes for you, which sometimes occurs. As far as the Internal Revenue Service is concerned, you can still claim the deduction. This works both ways, however. You can’t claim a deduction for taxes you might pay on behalf of the seller if they were paid or assessed during the time period up through the date before closing.

If you receive a refund of or rebate for any of these taxes during the year, you have to subtract that amount to arrive at the amount of your deduction. But if you pay additional taxes during the year, you can add them to what you paid at closing.

The Effect of the Tax Cuts and Jobs Act

These deductions have changed a little recently thanks to the Tax Cuts and Jobs Act, enacted in 2018. The new law now limits the mortgage interest deduction to mortgages of no more than $750,000. If your mortgage is more than this, you can only deduct the interest associated with the portion that falls below this threshold. This is down from $1 million in 2017, but $750,000 still buys a whole lot of house in most areas.

The property tax deduction has also been limited somewhat by the new law. It falls into an itemized deduction category known as “SALT,” for “state and local taxes.” The SALT bucket includes personal and real property taxes, and either state income taxes or sales taxes you might have paid during the tax year. Add them all together to arrive at the amount of your deduction – but it can’t be more than $10,000 as of 2018. The new tax law places this cap on the SALT deduction where none existed through 2017.

Costs You Can’t Claim

By now, you might have a pretty nice-sized tax deduction, but it won’t get any larger. These are the only closing costs from your HUD statement that you can claim. Again, if your points paid for any sort of service fees, these amounts are off limits. The same rule goes for your property taxes. You can’t claim a deduction for any portion of them that represents transfer or service fees, either. You would have to subtract these amounts from your deduction.

You can’t deduct closing costs such as the fee for your credit report, assumption fees or hazard insurance.

You used to be able to deduct mortgage insurance premiums as well, but this provision expired from the tax code as of Dec. 31, 2017. There’s been some talk that it might be resurrected again, however, so check with a tax professional after you close on your home so you can be sure of the current status.

You Have to Itemize

Here’s another bit of potentially bad news: You can’t make use of the SALT deduction or the mortgage interest deduction and claim the standard deduction for your filing status, too. These are both itemized deductions, and you must make the choice between claiming the standard deduction or itemizing – you can’t do both.

You might not have enough in overall itemized deductions to make itemizing worth your while because the new tax law also effectively doubled the standard deductions for all filing statuses as of 2018. Standard deductions are now set at $12,200 for single filers, $18,350 for head of household filers, and at $24,400 for married couples who file joint returns as of 2019. You’d need more in the way of total itemized deductions than your standard deduction before itemizing would make any sense. Otherwise, you’d be paying taxes on more income than you have to.

That said, you would include your closing costs on Schedule A if you do decide to itemize, then transfer the total of all your itemized deductions to your Form 1040.

What Is a HUD-1 Form?

Another important change took place in October 2015. The old HUD-1 Settlement Statement is gone. It’s been replaced by two new forms, the Loan Estimate and a Closing Disclosure. You would only receive a HUD-1 form at closing if you applied for your mortgage prior to Oct. 3, 2015.

But not to worry. The new forms still include all the information you’ll need to claim tax deductions for your mortgage interest and property taxes.

References

About the Author

Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.