New Homeowner Tip: Understanding Your Settlement Statement

September 28, 2015 : Lynn Ebel

Editor’s Note: Whether you are thinking of saying “goodbye” to rental life, completing your house hunting journey or a recent real estate buyer – here are some key tax tips to know for now and the future.

There are many factors you will look at when purchasing a new home, including affordability, location, size and what your favorite HGTV star would think of it, just to name a few. But other things will apply to any new purchase, as well. First of all, your taxes will be affected. Secondly, you will receive a ton of paperwork. In that pile of papers, there will be one document that should stand out above the rest – the settlement statement. Here’s what you need to know about it.

1. Save the settlement statement in a VERY safe place.

Unless you are buying your house with straight cash or receiving it as a gift, you will get a settlement statement during the process of buying a home. The HUD-1 statement is commonly used for this purpose. DO NOT THROW THIS AWAY. This statement is basically a receipt for your purchase of the home and itemizes out all the little charges agreed upon during the closing negotiations and other closing expenses, such as lender expenses.

2. The settlement statement has a lot of information on it.

There are many things listed on the settlement statement. Some items are added to your home’s basis (cost), which is important when you sell the house. Some things are immediately tax deductible or deductible over time, which is important when you’re preparing that tax return. And some things do not benefit you at all other than facilitating the sale.

3. The settlement statement includes information that indicates the “true cost” of your house.

The purchase price of your home is not necessarily the initial price tag on the home. Your basis in the home, which reduces the capital gains on the sale of it, may be much different than you think.

The following items are some of the settlement fees or closing costs, which may be explained on your settlement sheet, and are actually included in your basis in the purchased home:

  • Abstract fees
  • Charges for installing utility services
  • Legal fees (including title search and preparation of the sales contract and deed)
  • Recording fees
  • Surveys
  • Transfer taxes
  • Owner’s title insurance
  • Any amounts the seller owes that you agree to pay through negotiations, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Settlement costs do not include amounts placed in escrow for the future payment of items, such as taxes and insurance.

4. The settlement statement includes things that you can deduct at tax time.

You may already know that real estate taxes, mortgage interest, points and real estate taxes paid can be deductible on your tax return for the year of the purchase if you itemize your deductions. Many people find that becoming a homeowner actually makes itemizing your taxes way more beneficial than taking the standard deduction. Being one of the 33% of Americans who itemize their deductions is an upgrade to your taxes if it means you pay less in taxes overall.

5. Don’t think that EVERYTHING on the settlement statement is deductible.

It is good to know what doesn’t help your taxes, but still is explained in your settlement statement. The following items are closing costs not included in the basis of property or deductible on a purchase or refinance of your principal residence:

  1. Fire insurance premiums
  2. Rent for occupancy of the property before closing
  3. Charges for utilities or other services related to occupancy of the property before closing
  4. Fees for refinancing a mortgage
  5. Certain charges connected with getting a loan, including:
    • Loan assumption fees
    • Cost of a credit report
    • Fees for an appraisal required by a lender

It may be a shrewd negotiating move to pay more in deductible expenses, as the buyer, in exchange for the seller picking up the cost of these non-deductible items. That is just one way of haggling smarter during the process of buying a home.

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Lynn Ebel

Lynn Ebel

The Tax Institute, H&R Block

Lynn Ebel, JD, LLM, is manager of The Tax Institute's research department. Lynn specializes in real estate tax issues, including property transfers, passive activity losses, and bankruptcy issues.