The month of January was a whirlwind for me! In addition to filing client’s payroll tax returns and the normal build up to tax season, I was in the process of selling a house for the first time. Being that I put the house on the market right around Labor Day, I knew that home sales would be slowing down. Yes, I did receive a slew of low-ball offers which I promptly rejected. But I wasn’t prepared for all of the other demands from the buyers. So long story short, after four stressful months I finally received an acceptable offer on New Year’s Eve.
As soon as the paperwork was signed on both sides, naturally, my mind turned to the numbers. How much will I be receiving after settlement costs? What will the transfer taxes end up costing me? What type of fees will I be paying? So, I started thinking that I should go through some of the key tax items from the settlement sheet. Over the next two weeks I will discuss both deductions from the Buyers’ and Sellers’ point of view. Let’s start with the Buyer’s side this week. Note that any deduction listed below would be deductible as an itemized deduction or home office deduction, depending on your own personal tax situation.
- Seller’s Prepaid Items: in general, real estate taxes reimbursed to the seller are deductible. Other miscellaneous reimbursements such as homeowner’s association dues, sewer, trash, recycling, etc. are generally only deductible for the home office deduction.
- Origination Charges/Points: these are generally deducted over the life of your mortgage unless you meet a series of tests. There is a nine point test but the gist is that if the mortgage secures your home, the home is your main residence, the loan is to buy or build the home, and the amount was computed as a percentage of the principal amount of the mortgage, then they are deducted in the year paid.
- Mortgage Interest: this may or may not be included on your Form 1098. I would recommend calling your mortgage company to confirm one way or the other. If it isn’t included, it would be an additional interest deduction.
- Mortgage Insurance Premiums: to be currently deductible, the amounts must have been connected to a qualified mortgage. To be qualified, the mortgage insurance must be provided by the Department of Veteran Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance. Otherwise, they are deducted over the shorter of 84 months or the length of your mortgage. Lastly, the deduction is limited based on income and is completely phased out for married couples over $109,000 of AGI and $54,500 if single or married filing separate.
- Homeowners Insurance: this is generally only deductible if you qualify for the home office deduction.
- Escrow Deposits: unfortunately there is no current deduction for this. These monies become deductions when the taxes and/or insurance amounts are actually paid from the escrow.
- Other Items: payments for title insurance, transfer taxes, document preparation charges, endorsements, notary charges, etc. are not currently deductible.
For some of the items listed above, even if you cannot deduct them currently, they may be a benefit in the future as they are added to the basis of your home. Then when you sell your home, your capital gain will be reduced.
Pretty complicated, isn’t it? If you just bought your home or in the process of buying I urge you to speak with your tax advisor as soon as possible so you don’t miss out on these additional tax benefits.
Don’t forget to check back next week for part 2. And as always, please feel free to contact me with questions.