Deducting points and closing costs
Purchasing a house is rather embarrassing without a notion how to manage the closing charges at tax time. When you get a loan to purchase a house or when you refinance a current loan in your house, you may be charged settlement costs. As a rule, these embrace points, lawyer’s charges, recording fees, title search charges, assessment fees and loan or instrument preparation and processing charges.
You should know if you will be able to subtract those charges (partly or fully) on your federal income tax return or if they are just included to the buying price of your house. Prior to getting to that, we’ll give a definition to one term. Points are expenses your lender charges when you take out a loan secured by your home. A point equalizes 1 percent of the loan amount taken out. As a house purchaser, you may subtract points in the year that you purchase your residence if you list your subtractions. Although, you should comply with definite obligations. You may even subtract points the seller pays for you. 
Refinanced loans are handled in a different way. The points you pay on a refinanced loan should be paid back within the life of the loan, which means that you may subtract a definite part of the points every year. Though there is one exception: if a portion of your loan is spent on developments of your main residence, you may normally subtract the part of the points in the year they are paid.
Exclusion of capital gain when your house is sold
And now we’ll consider what occurs if you sell your house. In case you sell your main residence at a loss, it is impossible to subtract the loss on your tax return. If you put up for sale your main residence at a gain, you will be able to subtract all or a portion of the capital gain from the taxes.
In general, equity gain (or loss) on the sale of your main residence equalizes the sale cost minus your adjusted cost base in the real estate. Your adjusted cost base is the price of the real estate (i.e., what you paid for it primarily), plus charges paid for capital developments, less any devaluation and casualty damages claimed for taxing objectives.
If you comply with the obligations, you may subtract from federal income tax up to $250,000 of any equity gain resulting from the sale of your main residence, irrespective of your age. In most cases, a person or may make use of this subtraction only one time each two years. To qualify for a subtraction, you should have possessed and used your house as the main residence for two out of five years prior to selling.
What happens if you don’t succeed to comply with the two-out-of-five-years rule? You will still be able to subtract a portion of your gain if your house sale was because of the employment place alteration, health grounds or some other contingencies.
Besides, specific regulations may be appropriate in such cases:
a) If your main residence included a home office or was, in other ways, used partly for business objectives.
b) In case you sell abandoned land neighboring with your main residence.
c) If your main residence is in possession of a trust.
d) If you leased a part of your main residence to other residents.
e) If you shared your main residence ownership with a single taxpayer.
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