The question of ?Are closing costs tax deductible?? is a good one. The fact is that it depends on which closing costs are being referred to. Some closing costs are tax deductible but others are not. Being aware of what can be deducted can help a person file his or her taxes properly and avoid having to deal with an audit.
What is Tax Deductible?
A person can deduct both the monthly prepaid interest and prorated taxes from a home once it has been sold. If the deal is closed in the middle of the month, then the interest on the remainder of the loan for that month is fully tax deductible. The same principle applies to property taxes owed on a home if the home is sold in the middle of a month.
There are also certain types of points that can be deducted from your taxes. Points, which are sometimes known as a loan origination fee or loan discount, are essentially prepaid interest that many lenders require a person to pay upfront. While this adds an extra expense to buying a house, many homeowners opt to pay this money because it ensures that they are able to get a lower interest rate than would have otherwise been possible. In most cases, all the points can be deducted from your taxes.
Which Expenses Cannot be Deducted from Taxes?
The above mentioned costs are the only types of closing costs that are tax deductible. All other costs cannot be deducted from your taxes. These costs include appraisal fees, notary fees, the cost of preparing the mortgage note or deed of trust, the cost of hiring a real estate attorney and title insurance.
How to File a Tax Deduction for Closing Cost Expenses
Those who want to file a tax deduction for the costs noted above should file a 1040 form. A person who uses another tax payment form will not be able to claim a deduction for any of the costs noted above. Using a 1040 form, you can either claim a standard deduction or itemized deduction. An individual who opts to claim itemized deductions should seriously consider working with a certified public accountant, as these types of tax deductions are not easy to file and a small mistake can bring about an audit.
Many people tout the tax benefits of owning your own home and/or selling a home to buy a new one. The fact is that there are some very real tax benefits to buying real estate. However, you have to be knowledgeable in what these are as well as know how to clearly identify which closing costs cannot be deducted from your taxes. Prepaid interest, pro-rated taxes and points can all be filed as tax deductions. This can help you save a considerable amount of money. However, these must be filed properly and in some case the help of an experienced CPA will be required to make sure that the right tax form is used and that the information is clearly and accurately noted.
Category: Closing Costs, MortgagesTags: are-closing-costs-tax-deductible |
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