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Closing Costs that Are (and Aren’t) Tax-Deductible

are closing costs tax deductible

Most people who buy or refinance a home pay closing costs. You might wonder: “Are closing costs tax-deductible?” The good news is that some of these costs can count as tax deductions for homeowners, if you itemize your tax bill.

What does tax-deductible mean?

If an expense is tax-deductible, it simply means that the Internal Revenue Service (IRS) allows it to be subtracted from your income when you calculate the taxes you owe. In a nutshell, the lower your income, the lower your tax bill.

Most homeowners are familiar with two popular tax benefits of buying a home —  the mortgage interest deduction and the property tax deduction — but some of the more confusing federal tax deductions are related to closing costs. Let’s explore the most common tax questions about closing cost tax deductions for homeowners.

What closing costs can I deduct on my taxes?

You can write off some closing costs at tax time. Mortgage closing costs typically range between 2% and 6% of your loan amount. When you’re determining what to claim on taxes, it helps to know the IRS rules. Because each person’s tax situation may be different, you may want to consult a tax professional for specific guidance.

Tax-deductible closing costs can be written off in three ways:

  1. Deduct them in the year they are paid.
  2. Deduct them over the life of the loan.
  3. Add them to your basis when you sell the home.

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 represent a percentage of your loan amount. To be tax-deductible in the same year they are paid, you have to meet the following four conditions.
  1. The mortgage must have been used to buy or build your primary home.
  2. The points paid were normally priced for the area.
  3. You can prove that you or the seller paid the points.
  4. The amount is shown on your closing disclosure or settlement statement.
  • Points paid on a home improvement cash-out refinance. If you took out a new home loan for home improvements, the refinance points may be deductible. You’ll have to document that all of the cash was used for renovations on your primary residence or second home.
  • Mortgage insurance. Lenders may require mortgage insurance to cover the extra risk of offering a loan with a down payment of less than 20%. If you bought a home in 2019, private mortgage insurance premiums (PMI) may be deductible.
  • FHA mortgage insurance and VA funding fees. Government-backed loans typically cover the risks and defray the costs of their programs by charging mortgage insurance, funding fees or guarantee fees. The amount you can deduct should be included in box 5 of your mortgage tax form 1098. Tax-deductible costs may include:
    • Upfront mortgage insurance premiums (UFMIP) and mortgage insurance premiums (MIP) paid on a loan insured by the Federal Housing Administration (FHA).
    • Funding fees charged for a loan guaranteed by the U.S. Department of Veterans Affairs (VA).
    • Guarantee fees charged for a loan backed by the U.S. Department of Agriculture (USDA).

Closing costs that can be deducted over the life of your loan

If you can’t take tax deductions for buying a house in the year they are incurred, you still may be able to write them off over the life of your loan.

  • Points paid on a purchase loan. A portion of the points paid 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 that can be deducted when you sell your home

Some closing costs may be used to reduce the taxes on selling a house. They’re added to your “basis” — a measure of the total costs you paid when your home was purchased. These may include:

  • Owner’s title insurance. An owner’s title insurance 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.
  • Title fees when you buy. These costs may include escrow, endorsements and other title search fees.
  • Recording fees. Fees charged by a third party for documenting the transaction in public records.
  • Survey fees. A service to confirm the property’s boundaries.
  • Transfer or stamp taxes. Vary by state, but if you pay them they can be added to the basis.
  • 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 to be sure.

What closing costs are not tax-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:

  • Homeowners insurance premiums
  • Monthly principal payments
  • Utility costs (gas, water, electric)
  • Money lost on a sale that fell through
  • Home appraisal fees
  • Notary fees
  • Document preparation fees

Where can I find the closing cost information?

The mortgage tax form 1098 you receive from your mortgage company provides only 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. The graphic below shows where you can find the closing costs we outlined.

 

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