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About Real Estate Closing Costs

If you have recently purchased a home, you may be wondering how all of the real estate closing costs can impact your income tax return.  The closing costs were split between yourself and the seller according to whatever arrangement you negotiated.  If you had your home built, you most likely paid these costs when you made settlement on your mortgage, or before; when you acquired the land.

The only tax-deductible closing costs, as they pertain to a primary residence, are your real estate taxes, pro-rated property taxes, mortgage points, and your interest on your mortgage.  You paid these sums at closing, even though some of them aren’t, technically, closing costs.  You can only claim these costs if you file an itemized tax return.  You must claim the deductions for the tax year in which you purchased your home.

Unfortunately, all the other fees and charges you paid at the time of closing are not tax-deductible, they are simply costs incurred in the purchase of your home.  These charges do, nonetheless, add to the tax basis of your home and will come into play when, and if, you sell your primary residence.

Adding to the tax basis of your home are the abstract or title fees, legal fees for preparing the sales contract and deed, fees for the title search, transfer taxes, surveys, utility installation fees, owner’s title insurance, and recording fees.  Also, any amounts of money owed by the seller that you agreed to pay upon closing like sales commissions, repair or improvement expenses, back taxes and recording fees, mortgage fees, or others.

The tax benefits of the tax basis kick in when you sell your residence.  The total of these costs, along with others, will be used to determine if you made a profit or took a loss on this property.  They will be deducted from the profit as costs.  This will affect your capital gains tax at that time.

Some items that do not qualify as a tax deduction or tax basis are things such as rent for occupying the home prior to closing, fire insurance payments, appraisal fees, credit report costs, any charges or fees for using the home prior to closing, loan assumption fees, PMI fees, or any fees and charges related to refinancing a property.

When it comes time to sell your primary residence, if you ever do, you should consult a real estate tax specialist who can advise you on many ways to save tax liability and avoid capital gains taxes.

When you are at the last stage of buying a property, you need to pay a lot of unexpected expenses in the form of closing costs.  Are all of these expenses tax deductible?  How to account for such expenses? Chintamani Abhyankar writes useful tips.

About the Author

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.

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