It's Tax Time!
It’s Tax Time! What’s Deductible?
By Christina de Uribe, Esq.
April 18th will be here before we know it! There is no better time to familiarize yourself and your clients with potentially tax-deductible closing cost items.
While real estate agents and settlement attorneys aren’t tax specialists, and your clients should always seek advice from a CPA, the information in this article will assist in guiding your clients in the right direction.
To deduct expenses of owning a home, you must file Form 1040 U.S Individual Income Tax Return, and itemize your deduction on Schedule A.
1. Real Estate Taxes assessed to the homeowner are deductible. The homeowner must have paid them at settlement or to a taxing authority (either directly or through an escrow account) during the year.
2. Mortgage Interest is another typical itemized deduction. Mortgage interest is usually paid in arrears; and interest is prepaid on the Closing Disclosure (CD) through the end of the
month in which you close. This amount should be included in the mortgage interest statement, Form 1098, provided by the lender.
also be an itemized deduction on Schedule A. The amount paid during the year may be shown on Box 5 of the Form 1098, Mortgage Interest Statement.
4. Points are typically deductible (may also be called loan origination fees, or discount points). If you meet a points test created by the IRS, you can either deduct the full amount of the
points as interest in the year paid or deduct them over the life of the loan.
Expenses that Increase the Home’s Tax Basis
What if you are not exempt from Capital Gains Tax?
The amount of gain calculated for tax purposes is the amount realized less the adjusted tax basis in the property. Generally, the adjusted tax basis is calculated using the equation below.
Certain closing costs that may be part of the original basis include:
- Title Search Fees
- Legal Fees
- Recording Fees
- Cost of Survey
- Transfer or Stamp Taxes
- Owner’s Title Insurance
- Seller Owed Items the Buyer Pays i.e. back taxes
The seller would determine the amount realized on their sale by using the equation below.
Possible selling expenses include the following items on the settlement statement:
- Any sales commission (for example, a real estate agent’s sales commission)
- Any Fees for a Service That Helped Sell Your Home
- Any Advertising Fees Paid by The Seller
- Any Legal Fees Paid
There are at least a handful of settlement statement line items that are neither deductible, nor can they be added to the property’s basis.
Examples of these items include:
- Credit loan charges including credit report fees, appraisal fees and preparation of mortgage note or deed of trust fees
Hazard insurance premiums paid in advance or into the lender’s escrow account
- Homeowner’s association dues and condominium dues
- Rent for pre-occupancy of home
- Charges for utilities
While you’re not an accountant…
You can provide value, without giving them a thorough analysis of their tax implications!
Reach Out to your buyers who closed in 2022 with their ALTA & our Quick Tax Checklist!
Remind your sellers they MUST report the sale & their ALTA includes potential tax savings!
This material contains general information intended for licensed real estate agents and is not intended nor should it be relied upon as legal advice. Independent counsel should be consulted directly for specific advice on any particular circumstances. For information, you and/or your client(s) should consult a tax attorney, certified public accountant, or the Internal Revenue Service.
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