It’s Tax Time! What’s Deductible?

By Christina de Uribe, Esq.

April 15th 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.

DEDUCTABLE EXPENSES

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. 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.

2. Qualified Mortgage and Private Mortgage Insurance premiums the borrower pays may 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.

3. 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.

4. 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. Please note that the deductibility of many of these expenses are limited in some circumstances.

• 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

NONDEDUCTIBLE EXPENSES

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 2023 with their ALTA & our Quick Tax Checklist!

Remind your sellers they MUST report the sale & their ALTA includes potential tax savings!

Call Your Local MBH Office with Any Questions!  

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.