Are Closing Costs Tax-Deductible?
If you’ve bought or refinanced a home, you’re familiar with having to pay closing costs. But as tax time draws near, you might be asking yourself, “Are the closing costs I paid tax-deductible?”
If you itemize your taxes, some of your closing costs are tax-deductible in the year you paid them, others are deductible over time, and unfortunately, some aren’t deductible at all.
We’ll cover which closing costs are tax-deductible, why you can typically only deduct these costs if you itemize and where to find the specifics in your closing paperwork.
- Some closing costs are tax-deductible in the year you buy your home, while some are deductible over the life of your mortgage and others are not deductible at all.
- Expenses like title insurance may reduce the taxes you owe when you sell your home, but many sellers end up owing no taxes at all due to IRS exception rules.
- Having deductible closing costs doesn’t automatically save you money on taxes, especially if you don’t itemize your deductions.
What does tax-deductible mean?
A tax-deductible expense can be subtracted from your income to lower your tax bill when filing your U.S. income taxes. A taxpayer can itemize, meaning they list specific deductions, or take the standard deduction — a specific amount set by the IRS each year. If you take the standard deduction, you may not get an immediate tax benefit even if you paid costs that are technically tax-deductible.
Which closing costs are tax-deductible?
When you’re determining what to claim on taxes, it helps to know that the IRS rules for homeowners set out three categories of tax-deductible closing costs:
- Costs you can deduct in the year they are paid
- Costs you can deduct over the life of the loan
- Costs you can add to your basis when you sell the home
Closing costs that are and are not tax deductible
| Closing cost | Tax treatment |
|---|---|
| Mortgage points (purchase) | Usually deductible the year you purchase if you meet IRS requirements |
| Mortgage points (refinance) | Usually deducted over the life of the loan, except for points related to a home improvement, which may be deductible this year if you meet IRS requirements |
| Property taxes | Usually deductible each year if you itemize |
| Title insurance, recording fees, surveys, transfer taxes | Usually added to your home’s cost basis |
| Title insurance, recording fees, surveys, transfer taxes | Usually added to your home’s cost basis |
| Appraisal, homeowners insurance, HOA fees, notary fees | Not deductible |
Closing costs you can deduct in the year they are paid
Origination fees or points paid on a purchase
The IRS considers “mortgage points” to be charges paid to take out a mortgage. They may include origination fees or discount points, and they represent a percentage of your loan amount. To be tax-deductible in the same year they are paid, you have to meet these and other conditions:
- The mortgage must have been used to buy or build your primary home
- The points paid were normally priced for the area
- You can prove that you or the seller paid the points
- The amount is shown on your closing disclosure or settlement statement. You can find these and additional IRS rules for homeowners at IRS.gov.
Points paid on a home improvement cash-out refinance
If you used a cash-out refinance loan to pay for home improvements, the refinance points may be deductible in the year you paid them. You’ll have to document that all of the refinance cash was used for renovations on your primary residence or second home.
Closing costs you can deduct over the life of your loan
Some closing costs that can’t be deducted in the year they’re paid can be deducted over the life of the loan. That means you amortize – or divide the amount you paid by the total number of payments. You can deduct the allowable amount each year if you itemize deductions.
For example, if you take out a 15-year, $150,000 mortgage and pay $5,000 in points, you could deduct just under $28 per month — about $333 a year — for the full 180 months you have the mortgage.
Points paid on a purchase loan
If you didn’t qualify to deduct these costs in the year they were paid, or didn’t itemize your deductions that year, a portion may still be deductible for as long as you have the mortgage.
Points paid on a home improvement refinance loan
In cases where you used only a portion of your loan proceeds for home improvement, any additional points can be deducted over the remaining loan term.
Closing costs you can deduct when you sell your home
Your home’s basis, which is the amount you paid for the home, typically starts with the home sale price and some closing costs, such as title insurance. You can also add the cost of certain home improvements, such as a new roof or a kitchen or bath remodel. When you sell your home, the adjusted basis can lower the amount of taxes you owe (if any) on your profits.
Some closing costs may be used to reduce the taxes on selling a house, usually by adding to your home’s basis. These may include:
- Owner’s title insurance: This policy protects you against prior ownership claims on the property
- Property taxes: Only applicable if you paid any share of the seller’s taxes when you bought your home
- Abstract and title search fees: Costs related to researching the full history of your house and its ownership
- Recording fees: Fees charged by a third party for documenting the transaction in public records
- Survey fees: A survey confirms the property’s boundaries
- Transfer or stamp taxes: Taxes charged by a state, city or county when real estate changes hands
-
Distressed property expenses: If you purchased a home from a distressed seller and paid for any of the following items, you may be able to add them back to your basis:
- Costs of improvements or repairs
- Any back taxes or past-due interest paid
- Recording or mortgage fees
- Sales commissions
You won’t be able to add these expenses to the basis if the seller paid any of them when you bought your home. Check your closing disclosure to confirm who paid which closing costs.
Example: Which closing costs are deductible?
The Young family buys their dream home for a sale price of $300,000. They pay a variety of closing costs, including points, an appraisal and title insurance. Here’s how those closing costs work on their income taxes:
- Deductible in the same year: $2,400 in points. The Youngs can deduct that amount in the year they buy the home. But since they take the standard deduction, it doesn’t actually reduce their tax bill.
- Not deductible at all: $450 for the appraisal. Unfortunately, what they paid for their appraisal cannot be deducted.
- Added to their home’s basis: $1,200 in title insurance. When they sell their home five years later for $380,000, the title insurance cost bumps up their basis to $301,200. Their $78,800 profit is well below the $500,000 in tax-free profit the IRS allows for a married couple filing jointly.
Bottom line: While some of the closing costs were technically deductible, none ended up lowering the family’s taxes.
Which closing costs aren’t deductible?
You can’t deduct all of your housing-related expenses from your tax bill. Here’s a list of items that are not tax-deductible under any circumstances:
- Lender’s title insurance
- Homeowners insurance premiums
- Homeowners or condominium association fees
- Utility costs (gas, water, electric)
- Home appraisal fees
- Notary fees
- Mortgage insurance premiums, including FHA mortgage insurance, VA funding fees and USDA guarantee fees
- Document preparation fees
Although the costs listed above aren’t tax-deductible, you can use them to reduce the amount of capital gains tax you pay when you sell your home. To do this, you need to include them when calculating the cost basis of your home, which is the amount you paid for the home — including most settlement and closing costs. Remember that basis adjustments only matter when calculating capital gains on the sale of your home.
Where can I find my closing cost information?
The mortgage tax Form 1098 you receive from your mortgage company only provides information about the mortgage interest and property taxes paid in the prior year. You’ll need a copy of the closing disclosure from your closing paperwork to verify tax-deductible closing costs.
Frequently asked questions
Closing costs you pay when selling a home generally aren’t deductible on your taxes, but instead lower your taxable profit on the sale. One exception is property taxes paid before the sale, which you can deduct in the year you sell if you itemize on your taxes. However, this may not apply depending on how much you make: the IRS allows eligible sellers to make up to $250,000 on a home sale (or $500,000 if married filing jointly) tax-free.
Most mortgage refinance closing costs, like appraisal fees and title insurance, aren’t directly deductible on your taxes. However, you can deduct mortgage interest, including points, and real estate taxes. If you do a cash-out refinance to make major improvements to your home, you can typically deduct points related to the renovations in the year they were paid. Otherwise, you can deduct points paid for a refinance in equal increments over the life of the loan.
You must itemize your deductions — rather than taking the standard deduction — in order to claim closing cost deductions on your income taxes. To do so, you’ll enter the mortgage interest and property taxes from Form 1098 provided by your mortgage lender. If you paid points that are deductible over the life of the loan, they may not appear on that form. In that case, you may have to do the math yourself and enter that amount on your tax return.
If you’re buying a home and the seller pays some of your closing costs, you typically can’t deduct that amount. But there’s one exception: points paid by the seller. You may be able to deduct that amount on your taxes in the year it was paid if you itemize. But there’s a catch: you must reduce your home’s basis by that amount, which could mean you pay more in taxes when you sell.
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