Settlement or Closing Costs

In addition to the direct costs of the house, you can add to your basis certain costs that you paid at the settlement or closing.

First of all, remember that prepaid interest or points are deductible in the year of the purchase, under the rules outlined above. Real estate taxes for the day of the purchase and afterwards are also deductible by you, whether you paid them or the seller actually paid them. Real estate taxes up to and including the day before the sale are deductible by the seller. If either party actually paid taxes for any period when they did not own the home, the amount of taxes they paid is not deductible, but is added to their tax basis in the property.

Other settlement costs that can be added to your basis are listed below, along with some costs that may not be added to your basis. The general rule of thumb is that you can deduct most fees directly associated with acquiring the home, as opposed to costs associated with living in it, but you can deduct only those fees that you would have had if you had paid cash for the home. In other words, costs specifically incurred to take out a mortgage are not deductible.

The following items are commonly paid at settlement and can be added to your tax basis:

• attorney's fees
• abstract fees
• charges for installing utility services
• transfer and stamp taxes
• surveys
• owner's title insurance
• unreimbursed amounts that the seller owes but that you pay for back taxes or interest, recording fees for the deed or the mortgage, charges for improvements or repairs done before the sale, and selling commissions

The following items are not added to your basis and are not deductible:

• fire or liability insurance premiums
• charges for using utilities
• rent for occupying the home before closing
• any other fees or charges connected with occupying the home
• charges connected with getting or refinancing a mortgage loan, such as: FHA mortgage insurance premiums or VA funding fees, private mortgage insurance (PMI) premiums, loan assumption fees, cost of a credit report, cost of a preapproval or prequalification letter, fee for an appraisal required by the lender, and application fees, document fees, and any other miscellaneous fees imposed by the lender