What Can You Deduct From an ALTA Statement for Taxes?
Understand the tax-deductible elements of an ALTA statement and learn how to accurately allocate costs on your tax forms.
Tax deductions related to real estate transactions can significantly impact a taxpayer’s financial obligations. An ALTA statement, which itemizes the costs associated with buying or selling property, provides several opportunities for deductions. Understanding these potential deductions is essential for maximizing savings.
This article explores key components of an ALTA statement with tax significance and offers guidance on allocating these costs on tax forms.
Components With Tax Significance
An ALTA statement outlines various financial aspects of a real estate transaction, many of which carry tax implications. Identifying these tax-relevant components can help taxpayers optimize their filings and reduce taxable income.
Points
Points, also called loan origination or discount fees, are often paid by buyers to lower mortgage interest rates. Under the Internal Revenue Code (IRC) Section 461(g), taxpayers may deduct the full amount of points paid for a primary residence mortgage in the year they were paid, provided certain conditions are met. These include paying points from separate funds at closing and ensuring the loan is secured by the primary residence. If these criteria are not satisfied, points must be amortized over the loan’s lifespan. Taxpayers should maintain accurate records and refer to IRS Publication 936 for detailed guidance on mortgage interest deductions.
Property Taxes
Property taxes listed on the ALTA statement can be deducted under IRC Section 164. State and local property taxes paid during the tax year are deductible, including prorated taxes from the purchase date to the end of the tax period. However, deductions are limited to $10,000 for state and local taxes (SALT), including property taxes, under the Tax Cuts and Jobs Act of 2017. Taxpayers should ensure reported property taxes are based on the property’s assessed value and levied for public welfare. Understanding these limits is crucial for effective tax planning.
Prorations for Interest
When a home purchase occurs mid-month, buyers often pay interest from the closing date to month-end. This prorated interest is deductible under IRC Section 163 and can be included in the mortgage interest deduction on Schedule A of Form 1040. Homeowners should confirm the interest amount on their ALTA statement matches their lender’s records to ensure accurate reporting and avoid discrepancies.
Allocating Costs on Tax Forms
Allocating costs from an ALTA statement onto tax forms requires precision to comply with tax regulations. For mortgage interest, taxpayers should use Schedule A of Form 1040 to itemize deductions, ensuring figures from the ALTA statement align with lender-reported amounts.
Property taxes should also be reported on Schedule A, distinguishing deductible taxes from non-deductible fees. Given the complexities of varying state and local tax laws, consulting IRS instructions for Schedule A can be helpful. Taxpayers should carefully plan around the SALT deduction cap to maximize benefits.
Documentation for Audits
Maintaining thorough documentation is critical for potential audits. The IRS requires substantiation for deductions claimed on tax returns, making accurate record-keeping essential. Taxpayers should retain the ALTA statement as a primary source document, along with mortgage interest statements, property tax receipts, and other relevant records.
Digital tools, such as accounting software or cloud storage, can streamline document organization and retrieval. These systems can also track expenses and generate reports, simplifying audit preparation while minimizing errors.
Taxpayers should be mindful of IRS record retention guidelines. Generally, records should be kept for at least three years from the filing date, but this period extends to six years if substantial underreporting of income occurs. Being prepared ensures taxpayers can substantiate claims well after the transaction.
Resolving Statement Discrepancies
Discrepancies in ALTA statements can complicate tax filings and compliance. Mismatched figures between the ALTA statement and lender records are common and may lead to reporting errors. Addressing these discrepancies early prevents penalties and ensures accurate tax filings.
Carefully reviewing all transactional documents upon receipt is a proactive step. Cross-referencing the ALTA statement with closing statements, bank records, and lender communications can help identify errors. Consulting a qualified accountant or tax advisor can assist in reconciling discrepancies and clarifying the treatment of specific transaction components. Professional guidance ensures figures are accurately reflected, minimizing risks during tax reporting and audits.