It’s easy to get overwhelmed by the charges that are part of closing the transaction on a real estate purchase. Many settlement costs, often called closing costs, are required by your lender, real estate professionals and local government. But some of these costs are tax deductible, so they'll lower your bill when it's time to reconcile with Uncle Sam.
A mortgage point, sometimes called a discount point, equals 1 percent of the total loan amount, and buyers often pay “points” to the lender to lower their interest rate. Points are essentially prepaid mortgage interest, because what you pay up front will not be collected later. Any points you pay the lender are deductible for the year you purchased the property if that property is your primary residence. If the seller paid points on your behalf, you can even deduct those, although the seller and buyer cannot both deduct the points.
When you’re buying a property, you’ll likely see mortgage interest listed on your settlement sheet. Because mortgage interest is paid in arrears, or for the month before your payment, you’ll need to pay up front any interest that will accrue from the date of purchase until the first of the month. This mortgage interest is tax deductible for your primary residence in the year you purchased the property. Additionally, the monthly interest you pay with your mortgage can be deducted each year thereafter.
Owning real estate requires you to make ongoing property tax payments. Depending on your local government, these taxes might be paid twice a year, or your lender may require that monthly tax payments be included in your mortgage payment. If you purchase your home after the seller has already paid the current taxes, you may be required to pay your portion during settlement. These property taxes are tax deductible in the year you buy the property.
Private Mortgage Insurance
Your lender might require you to purchase private mortgage insurance, or PMI, if you put less than 20 percent down on the property. These PMI payments will be included with your mortgage payment each month. You might be required to prepay your PMI premium at the time of settlement. If you have a loan backed by the Federal Housing Administration or Department of Veterans Affairs and your household income is less than $100,000, you can deduct any PMI fees you pay at settlement for the year in which you buy the home. This deduction is good for purchases made from 2007 through 2013.
Kristen Radford Price began writing in 2005 for her campus newspaper. She has served as a feature writer for the life-and-style section of the "Daily Herald," a contributor to "Utah Valley Weekly," an editor for a small publishing house and now as director of communications for an Internet company. Radford has a Bachelor of Arts in journalism from Brigham Young University.