What can you deduct on taxes when buying a house?

 taxes-when-buying-a-houseWhich closing costs are tax-deductible?

 Closing costs are the bill for services you can't refuse if you want a mortgage. They vary from one lender to another, but they're not insignificant: they can add up to 7 percent of the amount of the loan. In other words, a $100,000 mortgage could entail as much as $7,000 in closing costs.

  Closing costs can include:

 Loan application and processing fees.

Would you believe that even after you and your spouse have filled out multiple-page application forms and gathered and photocopied and given the bank two years' worth of your income tax returns, bank statements, retirement account statements, and other financial documents, there's still paperwork left to be done by bank personnel? This is the bill for that paperwork.

 Fee for the credit reports that the bank buys to find out if you're creditworthy.

 Fee for title search and title insurance showing that the seller really is entitled to sell the house. The bank requires title insurance to protect itself against the risk that after you pay for your house, it will turn out that the seller didn't really own it. The policy protects you against that risk, too.

 Fee for a survey to show the exact boundaries of the property you're buying. This is what you'll whip out years from now to make your neighbor back down from trying to build his gazebo on your land.

 Underwriting fee. It pays for the bank's appraisal to make sure the house is worth enough to cover the loan if you default. (Note: You will pay separately for your own (much more thorough) inspection of the house to check the condition of its electrical, heating, and plumbing systems, not to mention the foundation and the roof, etc.)

 Loan points, sometimes called an origination fee, to reduce the interest rate charged on the mortgage.

 Lawyers' fees. The bank always has a lawyer. In some parts of the country, it's customary for you to have a lawyer, too; in others, it isn't. In any event, you pay your lawyer and the bank's lawyer.

 Escrow account deposit. This is your check for several months' worth of future property taxes and homeowners insurance premiums. The bank keeps your money and pays these taxes and premiums for you as they fall due.

 So what can you deduct?

 On a new mortgage, any points you pay are taxdeductible in the year you pay them. (Even if you add the points to the loan, they're deductible in the year you buy the house, if the points are less than your down payment.) If you're refinancing an existing mortgage, points are deductible only over the life of the new mortgage.

 Any amount you pay to reimburse the seller for local taxes that he or she has already paid on the property is fully tax-deductible. Amounts in the escrow account to cover property taxes are deductible only as they are paid out. Homeowners insurance premiums aren't deductible.

 There's no tax deduction for loan application or processing fees, credit report fees, or the cost of private mortgage insurance. Nor can you deduct the cost of the title search and title insurance, property survey, underwriting fee, attorneys' fees, mortgage tax, or filing fees but all those expenses do count as part of the total cost of the house.

Those costs will reduce your taxes on any profit you make when you sell the house because the greater your original cost, the smaller your gain when you sell. You can add any real estate agents' commissions to the cost of the house, too

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