This may be too dry and detailed, but some people love digging into the details, so here it is.
When I bought a home, I received a HUD-1 statement as required by law. Which of the items on this statement are deductible and how do I deduct them?
1. Taxes and Interest
Publication 530 “What You Can and Cannot Deduct” states “If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.”
“Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums and the amount applied to reduce the principal of the mortgage.”
“You cannot deduct any of the following items: Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance, wages you pay for domestic help, depreciation, the cost of utilities, such as gas, electricity, or water, most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information, forfeited deposits, down payments, or earnest money.”
“For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.”
“You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.”
Property taxes, loan interest and mortgage insurance should be listed in sections 900 and 1000 of the HUD-1 statement possibly listed as City Taxes, Town Taxes, County Taxes or some variation thereof. Property taxes, loan interest paid and mortgage insurance throughout the year are deducted on Schedule A so you must itemize to receive the deduction. If you do not deduct these during the year you pay them, you cannot deduct them in future years.
Stamp taxes should be listed in section 1200 of the HUD-1 statement possibly listed as Transfer Taxes, Stamp Taxes, City Tax/Stamps, County Tax/Stamps, State Tax/Stamps or some variation thereof. Stamp taxes are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.
2. Points
Publication 530 “Points” states “The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points.
“You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage.”
“If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions.”
Publication 936 “Points” states “If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.”
Points should be listed in section 800 of the HUD-1 statement possibly listed as Loan Origination Fee, Loan Discount Fee, Origination Charge, Credit or Charge Points or some variation thereof. Points are deducted on Schedule A so you must itemize to receive the deduction.
The tests I am about to discuss can all be found in Publication 636. If the loan was used to buy your main home, you are probably able to deduct all points the year you received the loan, but must satisfy 9 tests. If the loan was a home improvement loan, you are probably able to deduct all points the year you received the loan, but must satisfy 6 tests. If the loan was a refinance loan, you are probably may be able to deduct a portion of the points the year you receive the loan and deduct the remaining points over the life of the loan, but must satisfy 6 tests. In any of these cases, if you satisfy the appropriate tests, as most people do, you have the option to deduct the points over the life of the loan. For example, you would deduct 1/15 of the loan each year for a 15 year loan. If you missed any years, when you retire the loan, you will be able to deduct all points which were not deducted in previous years.
3. Basis
Publication 530 “Adjusted Basis” states “The following are some of the settlement fees and closing costs that you can include in the original 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 or stamp 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. “Here are some settlement and closing costs that you cannot deduct or add to your basis: fire insurance premiums, charges for using utilities or other services related to occupancy of the home before closing, rent for occupying the home before closing, charges connected with getting or refinancing a mortgage loan, such as loan assumption fees, cost of a credit report, and fee for an appraisal required by a lender.”
Loan Costs should be listed in section 800 of the HUD-1 statement possibly listed as Appraisal Fee, Credit Report, Tax Service Contract, Assumption Fee, Mortgage Insurance Application Premium, Lender’s Inspection Fee, Flood Certification Fee, Underwriting Fee, Application Fee or some variation thereof. Loan costs are not deductible.
Insurance should be listed in sections 900 and 1000 of the HUD-1 statement possibly listed as Fire Insurance, Homeowner’s Insurance, Flood Insurance, Hazard Insurance Origination Fee, Loan Discount Fee, Origination Charge, Credit or Charge Points or some variation thereof. Insurance is not deductible (unless it is Mortgage Insurance, see above).
Title Fees should be listed in section 1100 of the HUD-1 statement possibly listed as Title Services, Title Insurance, Title Settlement Fee, Lien Endorsement, Lien Coverage, Messenger, Overnight Delivery, Title Policy, Survey, Commitment Fee, or some variation thereof. Title fees are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.
Recording Fees should be listed in section 1200 of the HUD-1 statement possibly listed as Recording Charges, Recording fees, Rec sole & separate, Transfer Taxes, Stamp Taxes, City Tax/Stamps, County Tax/Stamps, State Tax/Stamps or some variation thereof. Recording fees are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.
This post was reposted from http://sizuservices.blogspot.com/2012/07/breaking-down-hud-for-tax-purposes.html, originally written on July 21st, 2012.
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