Sell Pays – Buyer Deducts – Get out those HUD-1's

[photopress:tax_1_2.jpg,full,alignright] When the Seller Pays the Buyer’s Closing Costs, the Buyer still gets to deduct those that are tax deductible.  Discount points to buy down the interest rate, may be a selling point for the seller, if interest rates are holding people back from purchasing.  Back in oh…about 1994 or so when the market was weak, sellers were offering to “buy down the rate”, and the IRS passed a rule saying seller paid discount points were tax deductible by the buyer, even though the seller paid them.

I have had accountants argue this point with me, saying it is not so.  But it is.  Those of us in the business back then remember it well, as it was retroactive, and we pulled all of our old HUD 1’s out and sent them to our clients with the new law, so they could file revised returns.

“The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s.”  This quote is from an IRS site.  The actual rule is not as clear as this consumer friendly explanation. 

Of course, consult an accountant about this, and also about the real estate taxes you may have paid to the seller as reimbursement, and not to the County direct.  Get out those HUD 1’s and bring them to your tax preparer along with your income and expense reciepts, if you purchased a property this year.  And if the seller paid your closing costs, make sure you have those costs itemized on the HUD 1.

Any closing costs that are tax deductible, not all are, are deductible by the buyer, even if the seller is the one who is paying them for the buyer.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

12 thoughts on “Sell Pays – Buyer Deducts – Get out those HUD-1's

  1. The following is not tax advice or any other kind of advice.

    True, provided the buyer subtracts the amount of seller-paid points from the purchase price of the residence in computing basis. In this case, the buyer’s basis in the home is not the purchase price. IRS Revenue Proclamation 94-27.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  2. Most people will opt to live in the property for the two years it takes to waive gain tax on appreciation at time of sale of principal residence. $250,000 for a single person and $500,000 for a couple. Of course no one knows if that will change by the time of sale, but based on current info, still seems deducting in the year paid, and adjusting basis, is the better bet for most people.

    Besides, adjusting basis seems appropriate as the costs were “rolled into” the price, so rolling them back out for basis gives a truer picture of actual cost of property.

    Speaking of “cost basis”, I’m surprised I don’t see more articles on “stepped up” basis and people transfering property to their children for $1, which becomes their basis for sale. If the property is inherited rather than gifted, the cost basis is “stepped up” to DOD value, with no gain if sold shortly after inherited.

    That one is a definite “check with your attorney and accountant” before gifting property to children.

  3. That’s been my understanding too Ardell. The logic is more simply that you can’t deduct interest on a mortgage that isn’t yours. Furthermore, in Sacramento the seller generally credits the buyer a flat dollar or percentage amount that is then used by the buyer for a variety of closing costs, including points.

    For the seller, it’s a credit and a reduction in their cost of sale. Buyer keeps the deduction.

    Good post! (and that comes from a lender)

  4. Marc,

    Prior to the change in the law, we used to put the seller paid items on the seller side of the HUD 1, more often than not. After the law change we made sure there was a dollar credit transfer, as you describe. This way the buyer doesn’t need the seller’s closing statement to find the buyer’s deductible items.

    Lenders didn’t need to approve the seller credit, when we simply shifted the actual costs to the seller side of the HUD 1.

    It’s good to know this from days gone by, so that if I ever need to increase the seller credit above the lender allowable amount, all I have to do is change the terms of the contract to “seller to pay total escrow fee” or some other language that shifts the responsibility for the cost item. We may need to know these things more if lenders get tighter, as we expect to happen.

    The more changes I see, the more it looks like “the way it used to be”, so being “older and wiser” is about to come in VERY handy, I suspect.

    I love finding reasons why it is better to be older 🙂

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