I was inspired to write this blog because one of my Realtor clients (thank you Sunita) asked me to draft a letter that she can forward to all the clients she helped buy property last year. This letter will outline possible tax deductions and be accompanied by a copy of their HUD1 settlement statement. I am posting a copy of this letter here for informational purposes only, we all know how complicated the tax code can be so this is just my understanding of how this works.
Dear ____________:
Once again, congratulation on the purchase of your new home last year and as tax season is fast approaching, I am including a copy of the HUD1 settlement statement, the “debits and credits” to the transaction so you can take advantage of some deductions available to homeowners. I have referenced the possible deductions with the line item on the settlement statement where appropriate.
I encourage you to discuss these items with your accountant but here’s a synopsis of a few pages of Publication 530 by The Internal Revenue Service entitled “Tax Information for Homeowners”.
Real Estate Taxes:
You may be able to deduct any amount paid as taxes to your state and local government, including amounts paid on your settlement statement. You may start deducting taxes from the day of settlement and forward, even if the seller paid them on your behalf.
If your taxes and insurance are escrowed with your lender (included in your monthly payment), you may only deduct what is being paid for taxes and not the hazard insurance.
Items you may not be able to deduct on your taxes include money collected by local or state government for water, trash collection, fees for single service such as lawn or pool maintenance.
Some special assessments are deductible provided they were paid for the benefit of marinating infrastructure that tends to increase your property value. Talk to your account.
You may not deduct homeowner association fees or transfer taxes (stamps).
Home Mortgage Interest:
You may be able to deduct interest on your home provided it is your main home (primary residence) for up to $1,000,000 or $500,000 if filing separately. Special limitations apply if you refinanced your loan.
Pre-paid interest on your settlement statement may be deductible.
Late payments and pre-payment penalties may be deductible.
Points:
You may be able to deduct the entire amount you paid as points provided the home you bought or built is your main home (primary residence), and points were not charged in lieu of other charges such as appraisal fee, inspection fee, title fee or closing fees. Points must be clearly shown your settlement statement
The points had to have been computed as a percentage of the loan amount and must be clearly itemized on the settlement statement.
You may be able to deduct points even if the seller paid for them on your behalf, provided you meet other qualification.
Basis:
Some fees on the settlement statement are not deductible but you can add them to your “basis”. This is the amount your accountant will use in the future to figure out how much profit you made from the sale of your property. The higher the basis, the less taxes you pay. These items include abstract fees, legal fees, recording fees, surveys, transfer taxes, owners title insurance. Additionally, some costs you paid on behalf of the seller can also add to your basis.
The above is not intended to be tax advise but rather a quick glance at some of allowable deductions. You are encouraged to consult your accountant for further clarification.
I encourage you to contact the IRS at 800-829-3676 or www.irs.gov/formspubs.com and request copies of Publication 936 “Home Mortgage Interest Deduction”, Publication 530 “Tax Information for Homeowners”. You can also write to the IRS at:
Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington , IL 61705-6613
