Your Guide to the Tax Treatment of Closing Costs: A Line-by-Line Look at the HUD-1

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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:

  1. Deductible as a current expense
  2. Added to the cost basis of the property and depreciated
  3. 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!

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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.

Related: A CPA Answers: How Can Investors Maximize Car-Related Tax Deductions?

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.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

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.

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!

About Author

Brandon Hall

Brandon Hall, owner of The Real Estate CPA, is an entrepreneur at heart who happens to be good at taxes. Brandon is a real estate investor and CPA specializing in providing business advice and creative tax strategies for real estate investors. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients. Sign up for my FREE NEWSLETTER to receive tips and updates related to business and taxes.

11 Comments

  1. Charles Worth

    Brandon,

    This is the type of really detailed stuff on key areas that are tough to know without having a pro on standby that newer investors need and that can be hard to find here. The only thing I would have liked to have seen is an example with numbers.

    Thank you for posting though.

    -Charles

  2. danae meurer

    Question for you, what if origination charge is $1000 and loan credit is -$1500 to reduce amount of cash you need to bring to closing. You end up with a negative number. How do you deal with that? We had that twice on refi’s last year and I am still curious what ends up happening with those numbers.
    Thanks!

    • Brandon Hall

      Hey Danae – for some reason I’m not receiving email notifications for new comments, sorry for the delay!

      If your situation, the -$500 will decrease the basis of the “loan closing costs” which decreases the amount you have to amortize over the life of the loan.

  3. Thanks for the article Brandon!

    Got a question I haven’t seen posted anywhere. I bought my first rental this year in late June. The previous owners had already paid all of the 2014 real estate tax before the closing (we pay in arrears in Illinois), so there are blanks on lines 106, 107, and 108. However, they paid about $5k for this year’s real estate taxes which is detailed on lines 210 and 211. While I see that normally the amounts on lines 210 and 211 reduce the amounts from 106-108, there is no mention what to do when that amount exceeds the amounts from lines 106-108. Is this a “negative expense” for the year? Do I treat as other income? Or just ignore the amounts on those two lines?

    Thanks in advance for your help!

  4. Daria B.

    Brandon,

    Thanks for the article. Effectively, I see that I have not been accounting, pun intended, for all the HUD items accurately. For an many times as I’ve gone through the closing process, it’s still a mystery on what should / can be / or should not be / depreciated and/or amortized.

    Section 800 definitely warrants more conversation.

    Thanks
    Daria

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