Assuming you are basically aware of your tax liabilities for the current year, and you have a feeling about whether additional deductions will be more useful this year or next year is the first step in determining how to schedule your closing. (Of course, if you aren't aware of your tax situation, it's best to consult an accountant or tax-preparer first.)

Now that you know your impending tax liabilities, you need to know that closing before the New Year will allow you to take the deductions for your home purchase immediately, i.e., the next time you file. On the other hand, closing in January will allow you to take those deductions the following year.

How closing costs affect your taxes

The allowable deductions include the points, the interest, and the property taxes, which you pay at closing, while the other costs associated with a closing like the title cost are added to the value of the property and are non-deductible. In addition, some special government fees such as water or sewer assessments that you may need to pay at closing might also not be deductible. Check with your accountant or refer to the IRS Publication #530 for more information about how these issues apply to your circumstances.

A "point" represents 1% of your loan amount. These can rage from ½ to 7 and are added to the originally agreed upon purchase price if you are obtaining a mortgage through a broker or another lender in order to cover that party's costs. While the number of points can fluctuate from lender to lender, these points are considered a "nonrecurring closing cost" and are fully deductible in the year paid. You must remember that this is only the case for a purchase. The points you are charged when you refinance must be amortized and deducted over the life of the loan. This is also the case in other situations like when a loan on a secondary home is secured by your main home, or when you are purchasing a rental property.

Along with the points, the prepaid and/or prorated interest, the interest charged between the closing and the 1st of the following month, is also deductible in the year paid. Furthermore, that month's mortgage payment won't be due until the first of the second month of the mortgage. Unlike rent, mortgage interest and principal payments are always paid in arrears, meaning they cover the period of time that has already past rather than the period of time that is starting on the due-date for the payment. For example, if your closing takes place on December 10th, your first monthly payment would begin to accrue on January 1st and would be payable the beginning of February. You probably would be required to prepay the interest form December 10th through the end of December. This pre-paid interest will fluctuate based on when in that month you choose to close so consider this when setting your closing date. At the end of the year, your lender will send you a 1099 form which will list that year's interest which should include the prorated interest you paid at closing. You will want to check it against your records at this point to ensure its accuracy.

Another issue to remember is the possibility of delinquent property taxes. While they weren't accrued while you owned the property, they need to be paid and you can roll them into your mortgage. Unfortunately, they aren't deductible and you would need to treat them as part of the cost of your home.

Other key considerations

Understanding which of these closing costs are deductible puts you in a better position to calculate the total deduction for which you should qualify. Keep in mind that once you purchase your property, you will need to decide whether or not to itemize your deductions. It is often in the best interest of a home-owner to itemize; however, if your itemized deductions, which include your mortgage interest and property taxes, do not exceed the standard deductions, you may be better off taking the standard deduction. Individual tax circumstances vary so it is recommended that you seek the advice of a tax accountant or preparer to determine your best option.

When choosing a closing date, another issue to keep in mind is that the last week of the month is usually the busiest time for title and escrow companies. Be sure to schedule your closing well in advance and ensure that all involved parties are aware of the closing date which you choose. If using a mortgage broker, this is often done for you, but it is recommended that you double check in order to ensure everyone will be able to attend the closing.

Additional information on which items will be tax deductible and which items will be added to the cost of your home can be found in IRS Publication #530, "Tax information for First Time Home Buyers." It is available online at http://www.irs.gov/pub/irs-pdf/p530.pdf or can be requested from the IRS.