About a month ago, the time finally came where I left my parents’ nest and moved out on my own to a land far, far away… 1.4 miles away, to be exact. It was my first home-buying experience and it sure felt like it.
If you’re like me and just bought a new home (congratulations, by the way!), you’re probably feeling a little overwhelmed (as I was), so, I want to outline all the tax deductions you’re entitled to after all the dust settles to help alleviate some stress and pressure, or stressure.
Closing Disclosure
In the past, homebuyers would receive a HUD-1 statement at closing which breaks down all the financial details of the purchase/sale. As of October 3, 2015, the HUD-1 is no more; you will now receive a document called the “Closing Disclosure” (which is basically the same thing), which is where you will find all your tax deductions for the year of the purchase.
The Consumer Financial Protection Bureau has an awesome page on their site that outlines the Closing Disclosure if you’re not familiar with it (what to look for, definitions, etc.).
Tax Deductions
Keep an eye out for the following deductions listed on your Closing Disclosure:
- Points (Page 2, Section A) – paid on a:
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- purchase – deductible in the year paid, or
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- refinance – deduct points paid on the portion of mortgage proceeds that were not used for home improvement over the life of the loan. Deduct points paid on the portion of mortgage proceeds that were used for home improvement in the year paid.
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- Note – you may be able to deduct the remaining points paid on an old mortgage if you are currently refinancing (will not be listed on your current Closing Disclosure).
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- Upfront mortgage insurance (Page 2, Section B) – deductible on FHA and conventional loans (over 84 months) if you qualify for the mortgage insurance deduction.
- Property taxes (Page 2, Section F) – actual and pro-rated property taxes are deductible in the year paid (property taxes paid into escrow––in Section G––are not deductible until they are paid out from escrow).
- Prepaid interest (Page 2, Section F) – pro-rated interest prepaid for the current month is deductible in the year paid.
- Prior prepayment penalty – a prepayment penalty on an old mortgage would be deductible in the year of the refinance, but your new and old mortgage lender must be different.
Other closing costs that are not mentioned above are NOT deductible but are added to your cost basis in the home. This applies when you sell the property for a capital gain (or loss). Capital gains (losses) are computed by taking the selling price of the home, less the cost basis, which is the initial purchase price + the cost of any improvements made to the home + nondeductible items listed on your Closing Disclosure.
Keep in mind, this all applies to properties purchased for personal/vacation use. There are different rules for business/investment property.
If you want to learn more about personal deductions as a result of a purchase or refinance, or which deductions apply to you if your purchased investment property, reach out to us! We’d be happy to help.
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Aiola CPA, PLLC is a 100% virtual CPA firm, specializing in tax planning and preparation for real estate investors. See more at www.aiolacpa.com
