Tax Issues: Understanding Cost Basis
When you are trying to determine the answer to the question can you deduct closing costs on your taxes, it is important that a home seller understands how to calculate the cost basis for the home that is being sold. Cost basis not only includes the amount of the payment directly to the original seller but also includes other costs. These costs include down payment, back taxes, deed recording fees, tax fees, broker (or lender) fees and other closing costs that were paid when you bought your home. Additional factors that impact the cost basis of a home include various improvements that may have been made as well as certain downgrades you might have made (for example, removing a swimming pool or garage). In addition, certain concessions you made as a seller may also be tax deductible.
What items are not tax deductible?
Premiums that were paid for insurance including homeowner liability, fire and personal mortgage insurance are not deductible either as a buyer or seller of a home. Other non-deductible expenses may include utility connections, and rental costs if you rented the home prior to purchasing the home. The Internal Revenue Service also will not allow the costs of credit reports, appraisals, loan assumption fees and refinancing fees. These should always be excluded when calculating the cost basis.
How to Deduct Closing Costs on Your Taxes
Once you have answered the question can you deduct closing costs on your taxes, you will need to fill out the proper forms from the Internal Revenue Service (IRS) to include with your tax return. Publication 523 provides information that includes a worksheet for determining the proper cost basis for the property. If the property was inherited, the proper form is form 8939 as the basis for the cost is different than if a homeowner purchased or built the home. The final deductions are filed on Schedule D (Capital Gains and Losses) and included with the tax return. The worksheets that are included in Publication 523 are for calculation purposes only and should be kept with tax records and not submitted to the Internal Revenue Service.
Additional critical information
In addition to making sure that the proper cost basis is used for the property, the Internal Revenue Service also requires that the person selling the home prove the home was a primary residence. There are specific requirements that must be met in order for the closing costs to be tax deductible. There are other instances where expenses may be tax deductible if a home was sold during the year. It is important if a homeowner sells their home that they speak with a qualified tax preparer to guarantee that they do not overlook deductions that they might be allowed. Accuracy is required to avoid having deductions excluded.
Internal Revenue Service
- Publication 523 https://www.irs.gov/pub/irs-pdf/p523.pdf
- Form 8939 https://www.irs.gov/pub/irs-dft/f8939--dft.pdf
The Federal Reserve Board - Consumers Guide to Settlement Costs: https://www.federalreserve.gov/pubs/settlement/default.htm
FHA - FHA Requirements: Closing Costs https://www.fha.com/closing_costs.cfm
- Home Sold Image: via https://www.stock.xchng/meerlap
- IRS Logo Public Domain via Wikimedia Commons/United States Department of Treasury