Understanding Closing Costs
Closing costs can be rolled into your home mortgage loan. Understanding them can help you negotiate the price of the home you are purchasing.
What's tax deductible?
There’s a widespread belief that all closing costs are deductible when filing federal taxes. That’s untrue for most, but there are exceptions — and they can be big ones.
The IRS says the following may be deducted by those who itemize their deductions:
Any property taxes paid by the buyer at closing, although there are special rules for cooperatives.
Prepaid mortgage insurance premiums (MIPs).
Mortgage origination fee. That’s is usually expressed as a percentage of the home loan amount, for example one point.
Discount points used to “buy down” a mortgage rate. These are paid to obtain a lower interest rate, not to originate the loan. These have to be pro-rated and deducted during the life of the mortgage. If you paid $3,000 in discount points to reduce the rate of a 30-year home loan, you’d be able to deduct 1/30th of the points, or $100 per year. If you refinance your mortgage, you’ll be allowed to deduct any discount points that have not yet been deducted.
Mortgage interest paid during the year.
To deduct any of these costs, you have to itemize your deductions on a Schedule A. If you take the standard deduction, you cannot deduct closing costs or interest expense.