Are Closing Costs Tax-Deductible? (2024)

When you buy, sell or refinance a home, closing costs are a pricey part of the transaction. And while most taxpayers should take the standard deduction over itemizing deductions on their income taxes to maximize savings, the year you purchase or refinance a home may be an exception.

Closing costs can result in tax-deductible expenses that you don’t incur in a regular year of homeownership, and those extra expenses can push you over the threshold to where it makes financial sense to itemize.

Are All Closing Costs Tax Deductible?

Not all closing costs are tax deductible. In general, costs that can be considered taxes or interest are deductible. But, as you’ll learn below, the IRS classifies some expenses as interest that the average person doesn’t. You may be able to deduct more closing costs than you think.

What Closing Costs Are Tax Deductible?: 5 Types

We’ll outline below the closing costs you can deduct on a home purchase, as well as any special considerations that might affect how much you can deduct or in what tax year you can claim the deduction.

First, you should know the current standard deduction amounts. For 2020 tax returns filed in 2021, the standard deduction is $12,400 for individuals, $18,650 for heads of household and $24,800 for married couples filing jointly and surviving spouses.

Your itemized deductions need to exceed these amounts to benefit from closing cost tax deductions. All your itemized deductions, including charitable donations, go on Schedule A of your annual federal tax return.

1. Property Taxes

State and local real estate taxes (property taxes) are deductible in the year you pay them. You can only deduct property taxes that are levied at a similar rate on all the real estate in your area to benefit the general welfare.

You can’t deduct more than $10,000 per year ($5,000 if married filing separately) in property taxes, sales taxes and state and local income taxes—combined.

2. Prepaid Interest

When you close on your mortgage, you will have to pay interest for a partial month unless you close on the first of the month.

For example, if you close on March 10, you will owe the lender interest for March 10 through March 31. Then, on April 1, you will make your first regular principal and interest payment. The interest you owe for March 10 through March 31 is called prepaid interest, and it’s deductible just like other mortgage interest.

For mortgage interest to be deductible, the mortgage must be secured by your home, and the proceeds must be used to build, buy or substantially improve your primary residence or second home. If you’re taking out a large mortgage, be aware that you can only deduct interest paid on the first $750,000 of mortgage debt ($375,000 if married filing separately).

Your lender should report all the interest you pay for the year on IRS Form 1098. If you pay less than $600 in interest, your lender doesn’t have to report it, but you can still deduct it. You can also deduct the mortgage interest you pay with your monthly payments, as well as any late fees you incur.

3. Points

The type of loan point you’re probably most familiar with is the type you pay to reduce your interest rate. The IRS considers these “discount points” to be prepaid interest, which generally makes them tax deductible in the year you pay them if you meet these conditions:

• The mortgage is secured by your main home.
• The mortgage is being used to buy, build or substantially improve your main home.
• Paying points is an established business practice in your area.
• You didn’t pay more points than is customary in your area.
• You use the cash (not accrual) method of accounting (most individuals do).
• The lender didn’t charge you more for points in exchange for charging less for something else other than interest.
• The cash you brought to closing was at least as much as the amount of points the lender charged.
• The points are calculated as a percentage of your loan amount.
• Your mortgage settlement statement clearly shows what you paid in points.

You can even deduct points if the seller pays them, as long as you meet the conditions above. However, when you sell your home, you’ll have to remember to reduce the value of the purchase price by any points the seller paid.

You will probably achieve the greatest tax savings by deducting all your points in the year you pay them, if you’re eligible to do so. Your other option is to deduct points over the life of your mortgage.

4. Origination Fees

The IRS classifies mortgage origination fees as points. You can deduct your loan origination fees, even if the seller pays them. These are the fees that lenders charge for underwriting and processing your mortgage.

5. Mortgage Insurance Premiums

The IRS considers four different types of expenses to be mortgage insurance premiums: private mortgage insurance (PMI), VA funding fees for VA loans, USDA loan guarantee fees and FHA loan up-front mortgage insurance premiums. The mortgage insurance deduction is constantly phasing out and getting renewed, so check the current law before you claim it.

Mortgage insurance can be paid monthly, in a lump sum at closing or in a lump sum that you finance along with your mortgage. The IRS says that for a lump sum fee, you can deduct the entire amount in the year you close on your mortgage, whether you pay the fee in cash or finance it.

This deduction also is subject to income limits. The mortgage insurance premium deduction phases out once your adjusted gross income (AGI) is more than $100,000 (whether you’re married or single; $50,000, if you’re married and file separately). You can’t claim the deduction at all once your AGI is more than $109,000 ($54,500 if you’re married filing separately).

When Are Closing Costs Tax-Deductible?

Home mortgage interest and certain real estate taxes you paid at closing can be tax-deductible.

Qualifying expenses include:

• Discount points
• Mortgage interest paid at settlement
• State and local real estate taxes (SALT)

Unfortunately, many closing costs, including homeowners association assessments, transfer taxes and lender fees, can’t be deducted.

You may also need to consult with your tax advisor to determine if you can deduct the full amount of paid mortgage points in the current tax year. Despite being prepaid interest, the IRS states that taxpayers typically deduct this expense over the mortgage’s term.

Additionally, you’ll need to file an itemized tax return to deduct most qualifying closing costs. This can be challenging, as most taxpayers claim the standard deduction.

Closing Costs That Aren’t Tax Deductible on a Home Purchase

Only mortgage interest and property taxes are potential deductions. That means the following fees are not tax deductible:

• Home appraisal
• Home inspection
• Pest inspection
• Title insurance
• Escrow fees
• Notary fees
• Attorney fees
• Homeowners association fees
• Flood determination fee
• Flood monitoring fee
• Home warranty fee
• Credit report fee
• Transfer taxes
• Stamp taxes
• Rent

Closing Costs You Can Deduct on a Home Sale

Home sellers pay closing costs, too, and these fees can take a major bite out of the sale proceeds. So it’s good to know a few ways to keep more of that money in your pocket.

If you’ve lived in your home two of the last five years, you don’t have to pay taxes on the first $250,000 of profit from selling your home if you’re single, or $500,000 if you’re married. These amounts are exemptions, which give you much greater tax savings than deductions.

If you’re selling your home for more than $250,000 ($500,000 if you’re married) more than you bought it for, anything you can do to increase your home’s cost basis will lower your capital gains tax on the profit from selling your home. Your home’s basis is the purchase price plus the costs you paid to maintain, improve and sell your home.

Some of the closing costs you can’t deduct as a buyer or seller can be added to your home’s cost basis instead, including:

• Title search and abstract of title fees
• Utility service installation fees
• Legal fees
• Recording fees
• Survey fees
• Transfer or stamp tax fees
• Owner’s title insurance

You also can add these selling expenses to your basis:

• Real estate agent commissions
• Advertising expenses
• Legal fees
• Loan charges you paid on the buyer’s behalf
• Any other fees or costs you incurred to sell your home, such as staging fees

Credit report, appraisal and homeowners insurance fees cannot be added to your home’s cost basis, nor are they deductible.

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