How to Claim Closing Cost Deduction on Income Tax Return

by K.C. Hernandez

    As a homeowner, you enjoy the tax benefits of writing off your real estate taxes and mortgage interest on a yearly basis. The Internal Revenue Service also allows you to deduct these expenses when incurred as part of a loan closing. After a refinance or purchase transaction on your principal residence, you can lower your taxable income by itemizing closing costs. Refer to updated IRS' instructions and laws before filing, and check with a tax professional if you are unsure of what counts as a closing cost deduction.

    Step 1

    Refer to the latest Publication 530, published by the IRS. For example, if you closed your loan in 2011, refer to Publication 530 for 2011 for a list of deductions you can and cannot take for the year, and the restrictions that apply.

    Step 2

    Refer to your settlement statement. Also known as a "HUD-1," after the Department of Housing and Urban Development that created and regulates it, the form is required on all real estate transactions involving a mortgage loan. You may have retained the HUD-1 along with your loan documents, but if you did not, you can usually request a copy from the closing agent (escrow) or your loan originator.

    Step 3

    Use the itemization method of deducting to write off closing costs. Itemizing makes sense when the standard deduction allowed for the year is less than the total of your deductible expenses. You cannot deduct closing costs if you opt for the standard deduction. You must itemize your deductions on Schedule A of IRS Form 1040.

    Step 4

    Identify the correct line on Schedule A for a particular closing cost. Real estate taxes paid at closing go on line 6 (see Tips section below). Mortgage interest goes on line 10 and 12. On line 10, you list mortgage interest paid in the form of points -- a percentage of the loan amount paid to the lender -- found on lines 801 and 802 of the HUD-1. You also list mortgage interest paid throughout the year on line 10, according to your annual mortgage interest statement, Form 1098. If your lender neglected to include mortgage interest prepaid at closing on your 1098, you may use line 12. Prepaid mortgage interest is found on line 901 of the HUD-1.

    Items you will need

    • IRS Form 1040
    • IRS Publication 530
    • Loan settement statement
    • Calculator

    Tip

    • Make sure to use the appropriate IRS Form 1040, which differs from its simplified counterparts, Forms 1040A and 1040EZ. Also referred to as the "long form," the 1040 gives you more opportunities than the shorter forms to reduce your tax bill, according to Bankrate.
    • The real estate taxes you can deduct, as instructed in Step 4, must have been paid out to the tax authority in the tax year. Real estate taxes paid and the time period it covers are on line 211 of the HUD-1.

    Warning

    • Although Publication 530 for 2011 states that mortgage insurance is tax deductible, keep in mind that tax laws changed for 2012. Mortgage insurance was deductible from 2007 through 2011 only. (see Ref. 6)

    Photo Credits

    • Comstock/Comstock/Getty Images

    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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