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,
