So, you've purchases a house. Like most people, you are probably confused about how to settle all those closing costs on your tax return. As you are probably aware, these costs are divided between you and the seller according to the sales contract, local custom or understanding of the parties. If you built your home you probably paid these costs when you bought the land or settled on your mortgage.
The only settlement or closing costs on your primary residence that you can deduct are home mortgage interest and real estate taxes. Both of these are not technically closing costs but you paid them at the time of closing. You deduct them in the year you buy your home if you itemize your deductions.
What about the other closing costs? These include all those dreaded "fees" you get charged; closing fees, title fees, HOA fees, etc… The bad news is that they are NOT tax deductible. These fees are basically expenses you paid to purchase your home. They do however add to the tax basis of your home.
The following are items that you can add to the basis of your home: - Abstract fees (abstract of title fees). - Charges for installing utility services. - Legal fees (including fees for the title search and preparation of the sales contract and deed). - Recording fees. - Surveys. - Transfer taxes. - Owner's title insurance. - Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions.
You will see the tax benefits of the charges above once you sell your primary residence. At that time, you'll take your purchase price and add the costs above to your tax basis to determine the gain or loss on the sale of your home.
Other closing costs that are deductible include prorated property taxes and points. You can learn about prorated property taxes at http://www.real-estate-owner.com/prorated-real-estate-tax.html. You can learn about points at http://www.real-estate-owner.com/points.html.
There are items that the IRS does not allow you to deduct as closing costs. Below are examples of closing costs that you absolutely cannot deduct nor adjust to your tax basis: 1. Fire insurance premiums. 2. Charges for using utilities or other services related to occupancy of the home before closing. 3. Rent for occupying the home before closing. 4. Charges connected with getting or refinancing a mortgage loan, such as: a. FHA or other mortgage insurance premiums and VA funding fees, b. Loan assumption fees, c. Cost of a credit report, and d. Fee for an appraisal required by a lender.
Closing costs can surprise many homeowners if they aren't prepared for them and can seriously deplete savings at a time when most people need money the most. It seems that lenders are constantly finding new and creative ways to tack on a few dollars here, and a few dollars there to the tune of thousands. However, by taking a few simple steps you can keep your closing costs low and know when to tell your lender that enough is enough!
First, you should always be a savvy consumer when it comes to title work. You have the right to select any title company you want and not the one that the mortgage company wants to force upon you. Of course, the mortgage company they want you to use always turns out to be one of the more expensive ones (because they are getting kickback fees). Shop around for a title work company and you can often save 30% right off the bat, and if you are willing to really work at it, save upwards of 50%. It's not chump change either - a title company can easily charge $1,200 for basic title services.
Next, be on the lookout for junk fees. Lenders love to pile on the document preparation fees, interest locking fees and anything else they can think of. Often times they throw these fees onto mortgages that have no points attached to them. Make sure that you ask your lender for a full disclosure of all the fees and then ask them about any that seem out of line. If you aren't happy with what they quote you, tell them you are looking around at other lenders. The last thing a lender wants to do is lose 30 years worth of interest because of a $200 junk fee!
If you aren't going to be in the house for more than a few years, ask the seller to pay the closing costs. Sure, you'll end up paying a higher interest rate, but if you plan on moving in a few years then the cost of the interest won't match the closing costs you would have to pay up front. Plus, you pay the extra interest off is small chunks each month rather than being out a lot of money up front.
Watch out for lenders who try to sell you add-on products with your mortgage. They love to try and get you to buy credit insurance (a total waste of money) and some lenders even try and sell you services such as "plumbing protection" or "whole house appliance protection". Just say no!
Remember, you have the power to say no thanks at any time before you sign on the dotted line. If you don't like the figures your lender is talking about for closing costs, shop around - in fact, you should around and get several mortgage offers before you even consider one. Don't be afraid to get up and walk away from the table. After all, it's your money - don't let a greedy lender try to squeeze another $1000 out of you when you have enough stress taking place buying a home in the first place!
Both Chris Castillo & Ratetake are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Chris Castillo has sinced written about articles on various topics from Tax, Tax Deductions and Tax. Chris is a software engineer who has extensively researched real estaet related topics and maintains which provides free real estate. Chris Castillo's top article generates over 2900 views. to your Favourites.
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