Can You Deduct Closing Costs on Your Tax Return?

When purchasing or refinancing a home, various fees and charges known as closing costs are incurred. These expenses are settled at the transaction’s conclusion, often representing a significant sum. Many individuals wonder whether these costs can reduce their tax liability. The tax treatment of closing costs depends on their specific nature and how they relate to the property.

Understanding Closing Costs

Closing costs represent a collection of expenses paid by buyers and sellers when a real estate transaction concludes. These charges cover services and fees associated with the transfer of property ownership and the securing of a mortgage. Common examples include loan origination fees, which lenders charge for processing the loan application, and appraisal fees, paid to determine the property’s market value.

Other closing costs include title insurance premiums, which protect against future claims on the property’s title, and recording fees, paid to the local government to officially register the new deed and mortgage. Buyers and sellers may also encounter attorney fees for legal services, survey fees to confirm property boundaries, and prepaid homeowner’s insurance premiums. These charges are itemized on a Closing Disclosure.

Identifying Deductible Closing Costs

Certain closing costs can provide tax benefits through deductions, if conditions are met. One significant deductible item is prepaid interest, often called “points” or “loan origination fees.” Points paid to obtain a mortgage for buying or building your primary residence are deductible in the year they are paid.

For points on a purchase or construction loan to be fully deductible in the year paid, several Internal Revenue Code Section 461 conditions apply. The loan must be secured by your principal residence, and the points must represent a percentage of the principal loan amount, not charges for services. Paying points must also be an established business practice in your area, and the amount paid must be customary. For refinanced mortgages, points are not deductible in full in the year paid; instead, they must be deducted ratably over the loan’s life.

Real estate taxes are another deductible closing cost. Any prepaid or accrued real estate taxes paid at closing are deductible in the year they are paid. This deduction falls under Section 164, which allows for the deduction of state and local taxes. The deduction for state and local taxes, including real estate taxes, is subject to a $10,000 per household per year limitation.

Claiming Your Closing Cost Deductions

To claim eligible closing cost deductions, taxpayers must itemize deductions on Schedule A (Form 1040). The total of all itemized deductions, including mortgage interest and property taxes, must exceed the standard deduction amount for a tax benefit. The standard deduction varies annually by filing status, for example, $14,600 for single filers and $29,200 for married couples filing jointly in 2024.

Lenders provide Form 1098, “Mortgage Interest Statement,” reporting mortgage interest paid, including deductible points. Mortgage interest is reported in Box 1 of Form 1098, and deductible points paid on a principal residence purchase are usually in Box 6. This information transfers to Schedule A, Line 8a for home mortgage interest and Line 8b for points not on Form 1098.

Property taxes paid at closing are reported on Schedule A, Line 5b, under “State and local real estate taxes.” Maintaining thorough records is important. Keep the Closing Disclosure or HUD-1 Settlement Statement, lender statements, and other relevant documentation with your tax records.

Non-Deductible Closing Costs and Basis Adjustment

Many closing costs are not currently deductible but can offer future tax advantages by being added to your home’s adjusted cost basis. These non-deductible items include appraisal fees, attorney fees, title insurance premiums, recording fees, inspection fees, homeowner’s insurance premiums, loan assumption fees, utility connection charges, and transfer taxes.

Adding these non-deductible costs to the home’s cost basis, as outlined in Section 1016, increases your overall investment for tax purposes. For instance, if you bought a home for $300,000 and paid $5,000 in non-deductible closing costs, your adjusted cost basis becomes $305,000. This adjustment directly impacts capital gains calculation when you sell the home.

A higher cost basis reduces taxable capital gain upon sale. If you sell the home for $400,000, without basis adjustment, your capital gain would be $100,000. However, with the $5,000 basis adjustment, your capital gain is reduced to $95,000, potentially lowering your capital gains tax liability. This highlights that while not all closing costs provide an immediate tax deduction, many contribute to a long-term tax benefit.