I bought a house in 2008, but I wasn’t sure if any of the rumored tax benefits would apply to me. I knew origination points were deductible, but I used a “no-fee” mortgage from Bank of America (i.e., I paid no origination points). I also knew property taxes and mortgage interest were deductible – but those are deductions I’ll be able to make every year I pay them (not just the year I buy the home). So … where is the big tax break?
With the help of my dad, who has worked in both the tax and mortgage industries, I discovered three things I could deduct on my HUD-1 (the document summarizing my home purchase finances). These deductions resulted in a large refund increase, so I thought I’d share.
Of course, I’m no expert. If you follow my tips (or your interpretation of them), it’s entirely possible you will end up getting audited, going to jail, or getting run over by a bus. As far as I know, all of this is perfectly legit, but read/follow at your own risk.
First, in addition to origination points, discount points are also deductable. I ran the numbers when we bought our home and found it would save us money in the long run to “buy down” our interest rate. I found the amount paid on line 802 of my HUD-1:
|800.||ITEMS PAYABLE IN CONNECTION WITH LOAN.||PAID FROM BORROWER’S FUNDS AT SETTLEMENT|
|801.||Loan Origination Fee||–|
|802.||Loan Discount % Bank of America||$1,771.20|
I included this as part of the deduction listed on line 10 (Home mtg interest and points reported to you on Form 1098) of Schedule A (Form 1040).
Additional mortgage interest
Although Bank of America sent me a statement of the mortgage interest paid (Form 1098), like other statements of this kind, it did not include the mortgage interest I paid at closing. (Mortgage interest is paid at closing to cover the time from then until the beginning of the next month – when the first mortgage payment will be made.) The mortgage interest paid at closing can be added to the amount listed on the bank statement and deducted together. You can find how much you paid at closing on line 901 on your HUD-1:
|900.||ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE||PAID FROM BORROWER’S FUNDS AT SETTLEMENT|
|901.||Interest from 01/31/08 to 02/01/08 @ $22.4700 /day 1 day||$22.47|
This is also included in the deduction listed on line 10 (Home mtg interest and points reported to you on Form 1098) of Schedule A (Form 1040).
Additional property taxes
Extra property tax deductions work essentially the same way as the mortgage interest. Property tax receipts / statements do not include the property taxes paid at closing. (Like mortgage interest, property taxes are paid at closing to cover the time until the first of the next month.) This amount can be added to the total property taxes paid the year of the closing. You can find how much you paid at closing on lines 210-219 of your HUD-1. Only lines 210-213 and 215 were filled out on mine:
|Adjustments for items unpaid by seller:||-||-|
|210.||City/town taxes – to –||–|
|211.||County taxes 01/01/08 to 01/31/08||$19.64|
|212.||Assessments – to –||–|
|213.||School/Taxes 01/01/08 to 01/31/08||$32.12|
|215.||MUD Taxes 01/01/08 to 01/31/08||$18.44|
I included these in the deduction listed on line 6 (Real estate taxes) of Schedule A (Form 1040).
Deducting these costs totalling $1,863.87 resulted in about a $500 increase in my refund – which is not a bad payoff for one phone call to my dad.
(It’s also something to note if you’re running a cost/benefit analysis of discount points on a loan. A discount point may not be as expensive at it seems if you include the tax write-off.)