Q: Last summer we refinanced our farm home. Line 103 of the settlement statement indicated that we had settlement charges of about $4,000. A month or so later, we listed the property for sale and it closed at the end of last year.
Our question is can we claim the $4,000 on our income tax itemized statement (schedule A) for last year?
A: Just about everybody has seen a settlement statement if they have purchased or sold a home during the last thirty years or so. That settlement statement is usually prepared by the closing agent, title company, settlement agent or by the person handling the closing of a residential transaction.
The settlement statement goes by the name of HUD-1, closing statement or settlement statement, depending on what state you are in when you close. But the document itself is a standard statement that is the same wherever you go to close on a residential real estate transaction. There might be some exceptions, but most everyone will agree that the form seems quite long and confusing, even after the so called improvements to the form that were in place at the beginning of last year.
The amount you referenced from line 103 is the sum of costs from the second page of the settlement statement. You are right to think that you might be able to deduct some of those expenses, but some are definitely not deductible.
The second page of the settlement statement will include charges from your lender to give you financing, may include points and fees charged by your lender, fees charged by the closing agent, title company and other parties, may include prepaid interest, as well as fees to record documents and amounts you might need to escrow for real estate taxes and insurance payments.
For practical purposes, you might have already deducted or have the right to deduct some of those fees. If you paid interest at the time of your closing, you might have received a 1099 form from your lender itemizing the interest that was part of that $4,000. You won’t be able to deduct that amount twice.
Some of the closing costs from that page of the form are not deductible in any event when you are dealing with a residential transaction. Some of these fees may be related to recording charges, title company fees and the closing fee. If your farm home is handled as a business, you’ll have to talk to your accountant to determine how to handle these expenses.
If you paid points to obtain the loan, you would have been entitled to divide the amount you paid by the number of years for your loan and deduct an equal amount each year that you had the loan. But since you have now paid that loan off, you may be entitled to deduct those points on your return for last year.
Other costs and expenses may go towards increasing the basis of your home, but not expenses for real estate taxes and insurance. That is to say, if you spent $3,000 in costs to obtain the loan and the basis on the home was $400,000, your new basis would be $403,000. And when you sell the home you would not owe any tax on the first $403,000 of the sales price.
(Keep in mind that current law allows you to exempt the first $250,000 in profit from taxation when you sell your primary residence and you have used that home as your primary residence during the prior two of the last five years. And if you are married, you can keep up to $500,000 in profits tax free if you qualify for the exemption.)
For precise information of what you can and can’t deduct, take a look at the booklet put out by the IRS called: Publication 523, “Selling Your Home” and Publication 936, “Home Mortgage Interest Deduction.” You can download these publications at www.IRS.gov.