“Closing costs” is an umbrella term for the various fees, fees and taxes which are due at”closing,” the meeting where the buyers of a house turn over their cash, the sellers turn over their keys, and everybody handles a lot of paperwork. Some of the closing costs are deductible on your federal income taxes.
Four frequent items paid at closing are deductible on your federal taxes: prepaid interest, points, mortgage insurance and property taxes.
Mortgage payments are different from lease payments because they cover the previous month rather than the forthcoming month. If you pay rent on April 1, for example, you’re spending to occupy a house for April. However, a mortgage payment on April 1 really covers the interest that accrued in March. That is not any big deal, except when you move to a brand new property. Your first mortgage payment won’t be due until you’ve been in the house a full calendar month. Inform you close the sale on Feb. 20. Your first payment won’t be due until April 1, and it will pay interest for the month of March. However, what about the interest that accrues between Feb. 20 and March 1? You cover that at closing. It’s called”prepaid interest” One of the reasons people try to schedule closings as late in the month as possible would be to reduce the total amount of prepaid interest thanks. However much you end up paying, it’s home mortgage interest, which is deductible on your income taxes. To get a better rate of interest on a loan, a lender may charge you”points” upfront at closing. One point is equivalent to 1% of the amount of the loan, so one point on a $400,000 mortgage could be $4,000. Points are a different kind of prepaid mortgage interest, so they’re also deductible. If your down payment is less than 20% of their purchase price, your lender may ask that you take mortgage insurance to protect the lender in case you default on the loan. Your first mortgage insurance premium is usually due at closing. As of 2010, mortgage insurance was tax deductible. The seller will have likely paid property taxes on the house in advance. At closing, you may reimburse the seller to get a percentage of the tax bill based on how much time is left in the tax period. Because this is a property tax payment, it’s deductible on your federal income taxes.
These expenses will be contained on the itemized settlement statement given to you in closing. Federal law requires you to receive a copy of this document, commonly called a”HUD-1″ form.
These closing costs are tax-deductible only if you itemize your deductions employing national Schedule A. You can itemize only if you file the Form 1040A or the Form 1040. You cannot itemize should you file the 1040EZ.
Mortgage interest is deductible only on the first and second houses. In some cases, points might be only partly deductible in the year you pay them. See the link from the Resources to check whether you can deduct the full price of your points.