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bvaranese
New Member

What closing costs can I deduct on my 2018 primary residence?

 
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Opus 17
Level 15

What closing costs can I deduct on my 2018 primary residence?

For both the sale and the purchase, you can only deduct property tax and items considered to be mortgage interest.  Other costs are considered part of the cost basis, or reduce the selling price, and may reduce your capital gains.

For the purchase:

1. Daily mortgage interest from the day you closed to the end of the month.  Shown on your closing document, this interest may not be included on your 1098. You can add it if it wasn't included. 

2. Property taxes.  Generally, the seller has prepaid a year's worth of property taxes and the buyer pays a credit to the seller for the amount of tax that is allocated to the days you will own the home.  That property tax credit is deductible as if you paid it directly to the city or county.

3. Mortgage "points." Origination fees or points are considered a form of mortgage interest and must be deducted over the life of the loan, unless you meet certain tests.  If you paid points, turbotax will ask you questions to see if you can deduct them all at once (in the year you closed) or if you have to spread them out.  Origination fees are considered points if they are a percentage of the loan amount (not a flat fee) and if they are not assigned to any specific services like document processing, attorney fee, or other specific costs.

Your down payment is not deductible, that's you paying for the house.  Money put into escrow is not deductible until it is actually used to pay a property tax bill. Until then it's still technically your money.


For the sale: 

1. You can deduct interest you actually paid, including interest that shows up on your closing statement but not your 1098 (if that is the case).

2. You can deduct property tax you paid, but you may have to reduce the deduction.  For example, if you paid the full year on January 15 and your closing was June 30, then you can't deduct property taxes for July 1-December 31 since you are not the owner.  The buyer paid you a credit at the closing for property taxes you already paid, and you have to reduce your property tax deduction by the amount of that credit.

In some cases, you might have to report taxable income.  For example, in New York state, county taxes are paid on January 15 but school taxes are paid in September, for the tax year July 1-June 30 of the next year.  Suppose you paid $2000 in county taxes on January 15, 2018, and $4000 in school taxes on September 15, 2017, and you closed on March 30.  The buyer would pay you a credit of about $1500 toward county taxes, and about $1000 toward school taxes.  That means you have an adjustment of -$2500, but only paid $2000.  That leave you with a net negative amount of -$500.  That has to be reported as income, assuming you took the itemized deduction in 2017.  It's reported as a taxable recovery, a reimbursement of a previous deduction, in the Other Uncommon Income section.

Some states (Illinois) may charge your taxes in arrears, so that if you closed on March 30, 2018, you had to pay a credit to the buyer because your 2018 taxes won't be billed to the new owner until 2019.  In that case it is a deduction to you this year.

The tax situation can be tricky depending on different state property tax calendars.  Whether you paid a credit or received a credit from the buyer will be on your closing statement.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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3 Replies
Ashby
New Member

What closing costs can I deduct on my 2018 primary residence?

Did you buy or sell your primary residence in 2018?
bvaranese
New Member

What closing costs can I deduct on my 2018 primary residence?

sold and bought
Opus 17
Level 15

What closing costs can I deduct on my 2018 primary residence?

For both the sale and the purchase, you can only deduct property tax and items considered to be mortgage interest.  Other costs are considered part of the cost basis, or reduce the selling price, and may reduce your capital gains.

For the purchase:

1. Daily mortgage interest from the day you closed to the end of the month.  Shown on your closing document, this interest may not be included on your 1098. You can add it if it wasn't included. 

2. Property taxes.  Generally, the seller has prepaid a year's worth of property taxes and the buyer pays a credit to the seller for the amount of tax that is allocated to the days you will own the home.  That property tax credit is deductible as if you paid it directly to the city or county.

3. Mortgage "points." Origination fees or points are considered a form of mortgage interest and must be deducted over the life of the loan, unless you meet certain tests.  If you paid points, turbotax will ask you questions to see if you can deduct them all at once (in the year you closed) or if you have to spread them out.  Origination fees are considered points if they are a percentage of the loan amount (not a flat fee) and if they are not assigned to any specific services like document processing, attorney fee, or other specific costs.

Your down payment is not deductible, that's you paying for the house.  Money put into escrow is not deductible until it is actually used to pay a property tax bill. Until then it's still technically your money.


For the sale: 

1. You can deduct interest you actually paid, including interest that shows up on your closing statement but not your 1098 (if that is the case).

2. You can deduct property tax you paid, but you may have to reduce the deduction.  For example, if you paid the full year on January 15 and your closing was June 30, then you can't deduct property taxes for July 1-December 31 since you are not the owner.  The buyer paid you a credit at the closing for property taxes you already paid, and you have to reduce your property tax deduction by the amount of that credit.

In some cases, you might have to report taxable income.  For example, in New York state, county taxes are paid on January 15 but school taxes are paid in September, for the tax year July 1-June 30 of the next year.  Suppose you paid $2000 in county taxes on January 15, 2018, and $4000 in school taxes on September 15, 2017, and you closed on March 30.  The buyer would pay you a credit of about $1500 toward county taxes, and about $1000 toward school taxes.  That means you have an adjustment of -$2500, but only paid $2000.  That leave you with a net negative amount of -$500.  That has to be reported as income, assuming you took the itemized deduction in 2017.  It's reported as a taxable recovery, a reimbursement of a previous deduction, in the Other Uncommon Income section.

Some states (Illinois) may charge your taxes in arrears, so that if you closed on March 30, 2018, you had to pay a credit to the buyer because your 2018 taxes won't be billed to the new owner until 2019.  In that case it is a deduction to you this year.

The tax situation can be tricky depending on different state property tax calendars.  Whether you paid a credit or received a credit from the buyer will be on your closing statement.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

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