Tax Treatment of Costs Incurred in Purchasing a Home
Immediately deductible items include prorated real estate taxes, loan origination fees (points), and prorated mortgage interest. Most everything else is added to your home’s basis and includes things like real estate commissions, attorney fees, and recording costs. Often times one of the largest parts of the closing costs are amounts paid to establish escrows for property taxes and insurances. Escrow amounts are not immediately deductible and do not add to your home’s basis. Since escrows are merely funds set aside in a separate account, they do not become deductions until your escrow agent actually submits those amounts for payment on property taxes (property insurance is a personal expense and is not deductible when escrowed or paid).
The points you pay on a mortgage are deductible the year you make the purchase. You can deduct any points you paid if you meet the following criteria:
- The loan is secured by your primary residence and the loan was used to buy, improve or build the home;
- The points are computed as a percentage of the loan principal;
- The points are clearly delineated on the buyer’s settlement statement; and
- You put cash into your home purchase in an amount at least equal to the points you were charged.
You may also deduct points that a seller paid for you at closing. When a seller pays points for the buyer (or in other words, buys the mortgage rate down) the buyer gets a lower mortgage rate and can claim the point’s deduction on their return.
Although you may deduct points paid on an original mortgage the year in which they are paid, you also have the option to deduct them ratably over the life of the loan. Keep this in mind if you don’t have enough deductions to fully utilize itemizing your points all in one year.
When real property is sold, the buyer and seller must apportion the real estate taxes for the year of sale. The agreement between the buyer and seller concerning who pays the taxes does not necessarily determine who gets to deduct the taxes. This is because a taxpayer cannot deduct real property taxes actually imposed on another taxpayer, unless the buyer pays delinquent taxes imposed on the seller; then that amount is added to his basis of the property. Generally, regardless of the taxpayer’s overall method of accounting, the date of sale and the real property tax year determine each party’s share of the taxes.
Essentially, property taxes must be apportioned between the buyer and seller based on the number of days each held the property during the property tax year. For this reason, if you buy or sell your home during the tax year it will be necessary to trace your real estate tax payments made at closing to your settlement statement.
To view the full article on Tax Tips for Homeowners please visit: http://www.dh-cpa.com/client_media/files/pdf/2014HomeownerTaxTips.pdf
Davis & Hodgdon Associates CPAs has been assisting nonprofits, individuals and businesses with tax and accounting services in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].