There are a variety of tax implications from buying and selling a home. Tax treatment of items can be confusing, particularly when the TP provides their HUD-1 Settlement Statements. Here is the proper treatment of these items and an accompanying HUD-1 form for reference.
TP Buys a Home
|Origination Fees and/or Points (1)||SCH A deduction. Can be taken in full in year of purchase or may need to be amortized over life of loan.||PUB 17, Chapter 23, Interest Expense, Points.
HUD-1 Stmt line 801-803
|Real estate taxes paid by buyer as a credit to buyers on HUD-1 (2)||Not deductible||PUB 17, Chapter 22, Real Estate Taxes
HUD-1 lines 210-212
- The TP’s 1098 mortgage statement may show deductible points. Don’t double-count those points and the points shown on the HUD-1.
- On the buyer’s side of the HUD-1 ledger, don’t put the escrow deposits for R/E taxes or insurance on the SCH A; those taxes will be paid in the following year and shown on a 1098 or their county tax billings. Seller’s share of real estate taxes paid by buyer are deducted in year following transaction and that amount must be included in the buyers cost basis. (See Chapter 22 of Pub 17, Real Estate Taxes.)
- Note: no other buyer costs on the HUD-1 statement affect the TP’s current tax return.
TP Sells a Home
|Real estate taxes paid by seller in advance (credit to buyers on HUD-1) (1)||SCH A, R/E Taxes;
Amount must also be added to basis to figure seller’s gain.
|PUB 17, Chapter 22, Real Estate Taxes
HUD-1 lines 210-212
|Realtor commissions, advertising fees, staging fees, loan charges paid by seller on behalf of buyer||Deducted from gross proceeds (selling price) to figure gain. Enter code ‘E’ and amount in ADJ column in TW capital gain worksheet||Pub 17, Chapter 15, Selling Your Home, Figuring Gain or Loss
HUD-1 lines 701-704 & TP documentation
|Settlement costs incurred when home was purchased. Includes: abstract fees, legal fees, recording fees, title insurance, survey fees (2)||Not deductible. These items are included in the basis.||Pub 17, Chapter 15, Selling Your Home, Determining Basis
HUD-1 lines 1100-1400
|Improvements to home||Add to basis to figure gain.||Pub 17, Chapter 15, Selling Your Home, Determining Basis|
- Be careful: mortgage company may report this payment to the TP on a separate 1098. Don’t double-count by using the same amount on the HUD-1 and the 1098.
- Will show on HUD-1 when home was purchased.
Written by Mark Riley, February 21, 2016