When you get ready to close on your home, expect to pay more than just the purchase price. You also have multiple Housing and Urban Development closing costs. From appraisal fees, to transfer stamps, to survey costs to title insurance -- it's like one of those infomercials where the emcee shouts, "Wait, there's more!" And only a few of the closing costs listed on the HUD-1 Settlement Statement are tax deductible.
Line 901 of the HUD-1 form is for mortgage interest that's required to be paid in advance. Mortgage interest that you prepaid at closing is tax deductible, provided the mortgage is secured by either your main home or a second home. You can only deduct the amount of that prepayment that applies to the current tax year on this year's return. If you prepaid mortgage interest for more than the current year, it's still tax deductible, but you'll have to spread the deduction out over the number of years that the interest covers.
Points You Paid
Lines 801 and 802 of the HUD-1 form refer to any loan origination fee or loan discount you have to pay at closing. These fees are commonly referred to as points. Paying points can reduce your interest rate, or they might be required to cover the cost of processing your loan. As far as the Internal Revenue Service is concerned, they all amount to the same thing: a form of prepaid interest that is tax deductible.
Points the Seller Paid
In most situations you have to pay an expense before you can write it off on your taxes. An exception is with points paid by the seller. You can take the tax deduction for points paid at closing, even if the seller paid the points for you. Unlike other forms of prepaid interest, you might be able to deduct your points in full in the year they were paid if the amount is clearly shown as points charged for the mortgage on the HUD-1 settlement statement. The one stipulation is that you and the seller can't both take the points deductions.
Real Estate Taxes
Lines 1001 through 1008 of the HUD-1 form are for escrow items, such as your property taxes and homeowners insurance. Insurance premiums aren't tax deductible, but you can write off real estate taxes that you pay at closing, provided they are actually paid to the taxing authority before the end of the tax year. You can only deduct the portion of real estate taxes that you actually owe. For example, real estate taxes are typically prorated as of the date of the sale. The seller is responsible for taxes up through the date of sale, and you are responsible after the date of sale. If you agree to pay the seller's back taxes at closing, that portion of your payment is not tax deductible, as those taxes were not imposed on you.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.