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Using Your HUD-1 For Tax Deductions

For many condo buyers in Washington, D.C., one of the most crucial steps in securing a new home is obtaining a home loan through a mortgage lender. What some new home buyers may not know is that getting a loan is more than just applying and getting approved. At closing, fees must be paid to the lender and are disclosed on the Department of Housing and Urban Development’s Settlement Statement known as the HUD-1.

The good news about these fees is that a portion of them are tax deductible and home owners can use their HUD-1 at the end of the year to obtain those deductions. Here are a few tax deductible items to pay attention to on your HUD-1:

Mortgage Interest

When you purchase a home, interest must be prepaid on the loan for the month in which you purchase it, unless it works out that the transaction closes on the final day of the month. Luckily, this prepaid mortgage interest is tax deductible. Refer to the section of the HUD-1 entitled “Items Required by Lender to be Paid in Advance” to find out exactly how much was prepaid and what can be applied at tax time.

Mortgage interest on seller-financed loans is also tax-deductible as long as you have the proper legal documentation denoting a reasonable interest rate and that the loan is secured by property.

Loan Points

Loan points, which are the percentage of the loan amount used to pay loan-related fees, are also tax deductible and found on your HUD-1. One percent is equal to one point, so in a $200,000 home loan of which $4,000, or 2 percent, is paid toward loan fees, two points are reflected on the HUD-1.

In addition to loan-related fees, discount points and premiums can also be considered. Discount points correspond to a type of pre-paid interest you may have paid up front in order to have a lower interest rate on the loan, while a premium is a type of discount point that is used to cover closing costs. The amount corresponding to the point count in the “Items Payable in Connection with Loan” of the HUD-1 applies toward your tax deductions, so be sure to pay attention to these items.

Property Taxes

Some, but not all, of the property taxes paid at closing are tax-deductible. While home owners pay property taxes just once a year, it is likely that at the time of purchase, the previous owner will have paid for a portion of your property tax from the time of the date of closing until the next property tax billing cycle.

To compensate for that difference the HUD-1 reflects a property tax payment or prepayment you may have made and those taxes are deductible as an itemized deduction on your return.

If you have any questions about finding and securing a beautiful condo in Washington, D.C., please don’t hesitate to contact us today.