Protect Your Closing Disclosure
Details of the Closing Disclosure
There are many items listed on the Closing Disclosure. Some 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 preparing a tax return. Other items listed will not benefit you (tax-wise) at all, other than facilitating the property sale.
The Closing Disclosure (unlike the old HUD-1) also contains the key terms of your mortgage agreement with the lender. You should check that these are correct when the Closing Disclosure is received. Included are the loan amount, interest rate, and loan term.
Another key area to check for are loan disclosures. This provides information for future items you will need to know for the loan. Examples include how late and partial payments are handled and if insurance & taxes are included as part of the mortgage payment. If any of the loan information is not described correctly, you should immediately contact the lender.
Getting Down to the “True Cost” of Your Home
The purchase price of your home is not necessarily the initial price tag. Your basis in the home, which reduces the capital gains of its future sale, may be much different than you think. The following items are some of the settlement fees or closing costs possibly included in your Closing Disclosure, and are actually included in your basis for the purchased home:
- Abstract fees
- Charges for installing utility services
- Legal fees (including title search, preparation of the sales contract, and deed)
- Recording fees
- 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.
Deductions During Tax Time
You may already know that 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 encourages itemizing your taxes which is more beneficial than accepting the standard deduction. Being one of the 29.6% of Americans who itemize their deductions is an upgrade to your tax filing if it means you pay less overall.
Limits of Tax Deductions
It’s good to understand all items included in your Closing Disclosure—including items that are non tax-deductible.
The following list includes closing cost line items not included in the basis of property, deductible on a purchase, or refinance of your principal residence:
- Fire insurance premiums
- Rent for occupancy of the property before closing
- Charges for utilities or other services related to occupancy of the property before closing
- Fees for refinancing a mortgage
- Charges connected with obtaining a loan, including:
- Loan assumption fees
- Cost of a credit report
- Fees for an appraisal required by a lender
TOD's TIP: 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.