Can I Deduct a HUD-1 Settlement?
Buying a house can be expensive. Besides the down payment, your closing costs may be steep. Once you factor in charges for the loan, title and prepaid items, such as mortgage interest, property taxes and hazard insurance, it can add to more than you bargained for. However, some of the costs listed on your settlement statement, or HUD-1, are tax-deductible, so it's in your best interest to understand what you can include on your income tax forms.
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Loan Points and Fees
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Loan discount points generally are tax-deductible for the year that you purchase your home. Each point is 1 percent of the loan and is used to reduce your interest rate on the principal balance. Rules apply, such as the requirement that other charges cannot be wrapped into the points by the lender. The mortgage must be for the purchase of your primary residence, and you must pay more at the close in cash than in points. If you have negotiated for the seller to pay some or all of your discount points, you still may take the deduction on your 1040 Schedule A, but both you and the seller may not claim them. Origination fees also are charged as points and are used to pay the lender. As long as they are not used to cover other closing costs, they are tax-deductible, too.
Interest and Taxes
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Part of your closing costs include prepaid items, such as interest on the loan and property taxes. If your mortgage payments are due on the first of the month, and you close on any day before that, you pre-pay the interest to the bank for the number of days until the first of the next month. Since interest is charged in arrears, which means that you pay for it after you incur it and not in advance, you won't pay on the first of the next month after the loan closes. Instead, you will pay your first full mortgage payment on the month after that. Since most mortgage interest is tax-deductible, you should be able to claim it on your return.
Property taxes are prorated by the number of days that the seller has owned the house. However, those taxes may have been prepaid by the seller for an amount of time after you take ownership. Therefore, you will repay a certain amount to the seller. Since property taxes are deductible, you may be able to claim the amount listed on your HUD-1.
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Capitalized Costs
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Capitalized costs on your HUD-1 are those that can be deducted on your tax return, but not all at once. You will have to divide the amount into the useful life of your property as designated by the Internal Revenue Service, with the remainder, if any, deducted at the time that you sell it. A common capitalized cost is depreciation of improvements to the property, such as your house structure. Others on the HUD-1 include settlement fees, title insurance, recording fees and real estate agent commissions.
Nondeductibles
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There are expenses on your HUD-1 that are not deductible. You may not claim them on your 1040 Schedule A for the year that they were incurred, nor may you capitalize them over the useful life. Therefore, these out-of-pocket costs will not benefit you except to serve to close the sale. Charges on your HUD-1 for items such as your credit report, mortgage insurance and hazard insurance cannot be taken off on your income taxes.
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