THE CASE OF “STRIP MINING THE CLOSING STATEMENT”

Hard working Hank bought the worst house in the neighborhood for $58,000. Over the next 4 years he invested $20,000 and, with a lot of sweet equity, the value rose dramatically. During this time he refinanced twice because interest rates went down and aggressive mortgage bankers offered him the moon. We got his tax return just after the second refinancing.

We asked whether he had paid any “points” for any of these financings. He said he had not, but we asked to examine his closing statements. We found that he had paid a total of $6,000 in points for the 3 mortgage closings but it was called “loan origination fees” and “loan discounts” which he didn’t understand as “points”. The term “points” has apparently been retired and dressed up with more palatable names. Because he had never deducted these fees before, and he had invested more that half of the refinancing proceeds in improving his house, we were able to change his filings for a savings of $1,200.

The icing on the cake was that he sold the house in the 4th year at a profit of $80,000, all nontaxable, and invested in a condo in a very upscale neighborhood. It’s so comforting to have a partner in Uncle Sam, and profitable too.