Your Guide to the Tax Treatment of Closing Costs: The HUD-1

If you are reading this article, you probably know what a HUD-1 settlement statement is, and you have more than likely seen one before. Maybe you have seen multiple HUD-1s and can recite the itemized lines contained therein. But the question I present to you today is: Do you fully understand the tax treatment of each line of your HUD-1? If not, read on, as I plan to lead you through areas of common misunderstandings.

The HUD-1 is a settlement statement and full of helpful and important information. HUD-1s may be simple and contain small amounts of information, while others may be complicated and jammed pack with data. When buying investment property (buy-and-hold), all HUD-1s have one thing in common, and that is the tax treatment of each line item.

Closing costs can amount to a significant outlay of capital, so it’s important to understand when you can recover that capital. Closing costs may fall into one of the following three categories:

Deductible as a current expense
Added to the cost basis of the property and depreciated
Amortized over the life of the loan

I’m going to walk you through a HUD-1 settlement statement and place each line item into one of the three tax categories above. This knowledge will help you when reviewing your tax practioner’s work. Here we go!

HUD-1 Statement

100 Section: Gross Amount Due from Borrower

101. Contract Sales Price: This is the agreed upon purchase price. You must divide the price into “improvements” and “land” and depreciate the improvements value over 27.5 years (39 non-residential real property). If you are unsure how to divvy up the value between land and improvements, read this article I wrote on the topic.
102. Personal Property: The price of any personal property included in the sale. This must be depreciated.
103. Settlement Charges to Borrower: This is an information line. This amount is also seen on line 1400, and the expenses that make up this amount will fall into all three tax categories.
106. City/Town Taxes: Deductible as a current expense, but only the portion greater than the value found on line 210.
107. County Taxes: Deductible as a current expense, but only the portion greater than the value found on line 211.
108. Assessments: Deductible as a current expense but only the portion greater than the value found on line 212. If, however, the assessment is specifically labeled as a local improvement district, they must be amortized over the life of the loan.

200 Section: Amounts Paid By or on Behalf of Borrower

201. Deposit or Earnest Money
202. Principal Amount of New Loans
203. Existing Loans Taken Subject To

These amounts are included in section 100 above, specifically lines 101 and 102. They provide information on how you acquired the property (i.e. did you finance the acquisition?). Of course, interest on loans is deductible as payments are made; however on the onset, you will not separate these three line items out individually and deduct, depreciate, or amortize them, as they have already been included in the 100 section.

206. Lender Cure: If any amount is show in this section, it is a reduction to closing costs and will reduce your overall basis in the property.
210. City/Town Taxes
211. County Taxes
212. Assessments

Line items 210, 211, and 212 will reduce line items 106, 107, and 108 respectively.

214. Transfer Taxes Credit: If any amount is show in this section, it is a reduction to closing costs and will reduce your overall basis in the property.

700 Section: Total Real Estate Broker Fees

701 and 702. Show the broker’s commission split.
703. Commission Paid at Settlement: As a buyer, you generally do not need to worry about this line item, as the seller covers agent commissions.

800 Section: Items Payable in Connection With the Loan

801. Loan Origination Charge
802. Loan Credit or Points for the Specific Interest Rate Chosen

These line items are amortized over the life of the loan. It’s important to note that loan points (line 802) must be amortized when paid in connection with investment property. This is an area for confusion, as loan points are deductible as a current expense when paid in connection with a primary residence.

804. Appraisal Fee: If required to obtain a loan, the cost is amortized over the life of the loan. If an appraisal is not required, the cost is added to the basis of the property and depreciated over the life of the property.
805. Credit Report
806. Lender’s Inspection Fee
807. Mortgage Insurance Application Fee
808. Assumption Fee
809. Flood Certification
810. Pre-Close Credit Report

All of these line items are amortized over the life of the loan.

900 Section: Items Required By Lender to Be Paid in Advance

901. Daily Interest Charges: Deductible as a current expense.
902. Mortgage Insurance Premium: Amortized over the payment period.
903. Homeowner’s Insurance: Amortized over the payment period.

1000 Section: Reserves Deposited With Lender

1001. Initial Deposit for Your Escrow Account: This amount will be deductible as a current expense when the funds are disbursed from your escrow account by the lender.
1002. Homeowner’s Insurance
1003. Mortgage Insurance
1004. Property Taxes

1002-1004 are deposited with your lender and will be deductible as a current expense when the funds are disbursed from your escrow account by the lender.

1100 Section: Title Charges

1101. Title Services and Lender’s Title Insurance
1102. Settlement or Closing Fee
1103. Owner’s Title Insurance
1104. Lender’s Title Insurance
1105. Lender’s Title Policy Limit
1106. Owner’s Title Policy Limit
1107. Agent’s Portion of Total Title Insurance Premium
1108. Underwriter’s Portion of Total Title Insurance Premium
1109. Document Preparation
1110. Notary Fees
1111. Attorney Fees

The aggregate of these line items are added to your property’s cost basis and depreciated over the life of the property.

1200 Section: Government Recording and Transfer Charges

1201. Government Recording Charges
1202. Recording Fees
1203. Transfer Taxes
1204. City/County Tax/Stamps
1205. State Tax/Stamps

The aggregate of these line items are added to your property’s cost basis and depreciated over the life of the property.

1300 Section: Additional Settlement Charges

1301. Required Services that You Can Shop For
1302. Survey
1303. Home Inspection
1304. Pest Inspection

The aggregate of these line items are added to your property’s cost basis and depreciated over the life of the property.

Summary

As you can see, the HUD-1 can cause misunderstandings in regard to the tax treatment of various line items. I hope I was able to clear the smoke and allow you to better understand how the HUD-1 will flow through to your tax returns.

Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.

Have you seen any unique line items not mentioned in the above article and are unsure about how they should be treated for taxes?

If so, let me know in the comments!