Can I Deduct A Down Payment On The New Home On My Taxes

Can I Deduct A Down Payment On The New Home On My Taxes

Can I Deduct a Down Payment on the New Home on My Taxes?

by K.C. Hernandez, Demand Media 

The home loan down payment helps you get the loan, not the tax deduction.

The home loan down payment helps you get the loan, not the tax deduction.

Homeowners benefit from several tax deductions. As a recent home buyer, you may deduct some closing costs for the year in which you bought, certain recurring loan fees and real estate taxes for as long as you own. The down payment itself can't be deducted, unless it comes from another source such as another home refinance. But since the down payment helps you get the loan, the fees associated with the loan can be deducted.

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Description

A home buyer usually contributes a minimum amount of his own funds to finance a real estate purchase. The lender requires the borrower invest a specified amount to the transaction because it lowers its risk. The larger the down payment, the less likely a borrower is to default on a home loan. As a result, high-risk loans require at least a 25 percent down payment. Borrowers who invest less than 20 percent require mortgage insurance to offset the lenders risk. A down payment is a one-time payment to the seller which helps you get a home loan.

Deductions

Purchasing a home can lead to significant deductions come tax time. A borrower may deduct these closing costs on a primary residence purchase: points, or fees paid for the loan origination and specific interest rate; mortgage interest; mortgage insurance and real estate taxes. Points are paid once, upon loan settlement. Interest, insurance and taxes are recurring costs that may be written off for each year paid.

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Identification

Developed by the Department of Housing and Urban Development, the HUD-1 Settlement Statement reflects all closing costs. A borrower may deduct lines 801 and 802 for loan origination and points; lines 901 and 902 for mortgage interest and insurance; and any prorated real estate taxes paid at closing. The down payment is accounted for as part of a lump sum due at closing in line 120 of the HUD-1. It includes the closing costs plus the down payment required.

Considerations

A borrower can write off the portion of closing costs he did not pay out-of-pocket. For example, he can deduct all seller-paid closing costs that covered his deductible items, including pre-paid mortgage interest, insurance and taxes. A seller may also pay points, which are deductible. A down payment is only tax deductible if the funds came from a deductible source, such as another home loan refinance, second mortgage or home equity line of credit on another property. A down payment that comes from such sources is deducted for the year in which mortgage interest is paid.


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Dated: December 3rd 2015
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