We are trying to sell our condo which our daughter and family reside. We lived there from 2003 until 2008. We refinanced it in 2016. What, if any, refinance fees may be expenses to cost basis to calculate capital gains?
-Thomas
Thomas,
In general, the only settlement or closing costs that are deductible are home mortgage interest and certain real estate taxes. Points you pay to obtain an original home mortgage can be, depending on the circumstances, fully deductible in the year you pay them. On the other hand, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan. You deduct your original home mortgage points in the year you purchase your home if you itemize your deductions. Certain other settlement or mortgage closing costs are not deductible immediately but rather are added to your home’s cost basis and help reduce any taxable gain you may have when you sell your home.
Your home’s "basis" is the value of your home for the purposes of calculating future capital gains taxes. Essentially, when you sell your home, your gain (profit) or loss for tax purposes is determined by subtracting its basis (originally calculated value when you bought it) plus the cost of any improvements from the sales price (plus sales expenses, such as real estate commissions). The larger your basis, the smaller the gap to the current value of the home. In turn, this reduces the profit on which taxes are levied. There is also the homeowner exclusion. If you meet the requirements (i.e., you own and have lived in the home for two of the last five years), you can exclude $250,000 (single filers) or $500,000 (joint filers) of primary home sale profit from your taxable income.
Mortgage-related items that can be added to the basis include recording fees, owner's title insurance, and more. The following are some of the settlement fees and closing costs that you can include in the original basis of your home.
- Abstract fees (abstract of title fees)
- Charges for installing utility services
- Legal fees (including fees for the title search and preparation of the sales contract and deed)
- Recording fees
- Surveys
- Transfer or stamp taxes
- Owner's title insurance
- Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions
If the seller paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement.
Here are some settlement and closing costs that you cannot deduct
or add to your basis.
- Fire insurance premiums.
- Charges for using utilities or other services related to occupancy of the home before closing.
- Rent for occupying the home before closing.
- Charges connected with getting or refinancing a mortgage loan, such as:
- Loan assumption fees,
- Cost of a credit report, and
- Fee for an appraisal required by a lender.
Whether it’s for your original home purchase or a mortgage refinance, your final escrow statement will contain a number of entries. In general, only your mortgage interest and property taxes are deductible in the year of the transaction, while some expenses and fees can be added to the cost basis of your property so that they can reduce any gain you may have when you sell your home. There are also a few expenses that you can neither deduct nor add to cost basis.
Deductibly Yours,
Dave