Can I Use HUD-1 for Deductions?

by K.C. Hernandez, Demand Media
    You can deduct some HUD-1 closing costs on your taxes.

    You can deduct some HUD-1 closing costs on your taxes.

    There are three main tax deductions available after purchasing your home, and you must meet certain conditions in order to deduct the full amount. You must also hold on to the list of settlement costs you paid at closing to get the most accurate figures for your deductions.

    The Basics

    Most home buyers finance the purchase of their home with a mortgage, or home loan. Getting a loan involves fees paid to the lender at closing, which are disclosed on the Department of Housing and Urban Development's Settlement Statement known as the HUD-1. Also listed on the HUD-1 are non-loan costs, such as service fees for escrow, title, notary and amounts paid to third parties such as the local tax authority. Mortgage interest, loan points and real estate taxes paid at closing are tax-deductible. It is important to refer to your HUD-1 when preparing taxes.

    Mortgage Interest

    The HUD-1 reflects prepaid mortgage interest on line 901 in the section entitled "Items Required by Lender to be Paid in Advance." You must prepay interest on the loan for the month in which you purchase it, unless the transaction closes on the final day of the month. For example, a closing date of January 15 requires 16 days of prepaid mortgage interest. Mortgage interest on seller-financed loans is also tax-deductible, as long as legal documentation exists denoting a reasonable interest rate and that the loan is secured by property.

    Loan Points

    The percentage of the loan amount used to pay loan-related fees is referred to in terms of points. One percent equals one point. For example, a $200,000 loan that cost the buyer 2 points is equal to $4,000. Points include the origination fee an institutional lender or mortgage broker may charge for the service of originating the loan. They also include discount points, a type of pre-paid interest you pay up-front in exchange for a lower interest rate. You can also deduct premiums, a type of discount point that is used to cover your closing costs. These points increase your interest rate in exchange for absorbing those fees. These fees appear in lines 801, 802 and 803 in the section entitled "Items Payable in Connection with Loan."

    Property Taxes

    Some of the real -estate taxes paid at closing are tax-deductible. For example, if the seller paid his taxes in advance for the year in which you bought his home, you owed him a reimbursement for the portion of taxes he prepaid for the period after you became the owner. This prorated amount is reflected as a credit to the seller on the HUD-1. The amount also reflects as a buyer debit, which can be found on line 107 under the section entitled "Adjustment for items paid by seller in advance."

    About the Author

    K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.

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