In a real estate sales transaction, the buyer can negotiate certain concessions. A seller may agree to pay a portion or all of the buyer's closing costs, up to a certain amount. Seller-paid closing costs may benefit both parties. A seller can fetch a higher price for his property and the buyer does not have to come in with as much out-of-pocket money to close. Buyers get the added benefit of deducting seller-paid closing costs at tax time.
The Basics
At closing, the buyer and seller pay their portion of closing -- or settlement -- costs, according to their sales agreement. Common closing costs include escrow and title services, as well as mortgage acquisition fees for the buyer. When the seller agrees to pay the closing costs, he agrees to issue a credit at closing, which the escrow agent will apply toward the buyer's portion of fees. A seller credit reduces the seller's net proceeds, but can be a good financial decision if it allows him to sell the home at a desired price and brings an able and willing buyer.
Identification
The Department of Housing and Urban Development requires that buyers who use a home loan to purchase receive a settlement statement of the final costs known as a HUD-1. The form lists all fees and credits applied to each party, by category. The seller credit to the buyer is found within Section 200 of the HUD-1. The credit amount, which is typically negotiated before the close of escrow, may exceed the actual amount needed to pay those items that are tax deductible, such as mortgage interest, points and real estate taxes. In this case, the buyer may only deduct the amount paid for deductible items.
Deductible Items
Mortgage interest is paid through the end of the month in which the transaction closes. The buyer prepays interest from the first day he acquires the loan. For example, a closing date of March 7 requires 24 days of pre-paid interest. Points represent the amount due in lender fees, expressed as a percentage of the loan amount. For example, a $100,000 loan that cost $2,000 cost two points. The buyer is responsible for his portion of property taxes -- which the seller can pay on the buyer's behalf.-- beginning on the settlement date.
Considerations
To deduct seller-paid closing costs, the buyer must use the itemization method. It is the optimal way to deduct if the amount of closing costs paid on the buyer's behalf exceed the standard deduction. For example, in 2012, the standard deduction for a single individual is $5,950 and $11,900 for married couples filing jointly. Itemizing closing costs makes sense if the sum of mortgage interest, property taxes and points paid in 2012 exceeds these standard deductions.
References
Writer Bio
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.