The HUD-1 form is the final settlement statement in a real estate transaction. It discloses the purchase price and all income and disbursement made through escrow. When a real estate closes, a certified HUD-1 is sent to all parties in the transaction, including the buyers and sellers. It discloses several items that can be deducted on an individual tax return, such as interest and property taxes. When preparing your taxes, you'll need the final HUD-1 to determine the taxes and interest you paid to close the transaction. Both buyers and sellers may have deductions that are shown on the final HUD-1.
Buyer Deductions for Interest and Taxes
When a buyer purchases a property and it is a principle residence, if there is a loan involved, there will be some form of interest to deduct reflected on the final HUD-1, as well as property taxes. Property taxes paid at closing can be found on lines 106 and 107 of page 1 and line 1004 of page 2. Add these amounts together and include them on your federal tax return, schedule A, line 6. Interest paid is shown on line 901 of page 2 of the HUD-1 and can be deducted on Schedule A, line 10. Interest and taxes paid on a rental property are shown on schedule E of federal form 1040.
In some loans, lenders charge loan origination fees to the borrower. This is considered interest by the Internal Revenue Service. The fees are referred to as points. These are deductible in the year paid, as long as the new loan on the property is under $1,000,000. Points paid are shown on line 801 of page 2 of the HUD-1. This amount is deductible on schedule A of itemized deductions on line 12. The itemized deduction only applies to points paid on a principal residence.
Seller Deduction for Taxes
Sellers typically pay property taxes at closing. These taxes are shown on line 406 and 407 of the HUD-1 and deductible on line 6 of your federal tax return, schedule A, line 6. This applies to a principle residence only. If the property is a rental, the taxes are deducted on schedule E of federal form 1040.
If audited, you'll need a copy of the final, certified HUD-1 statement from escrow to substantiate your deductions. Sometimes during the escrow process, estimated HUD-1 statements are provided to show approximate amounts owed and due in the transaction. Only the figures from the final HUD-1 may be used when writing off expenses for taxes. An accountant or tax preparer can assist you in locating the correct figures to deduct.