Can You Deduct Closing Costs on Your Taxes?

Closing costs are fees and expenses paid at the close of a real estate transaction. These costs cover various services and fees associated with finalizing the property transfer and loan. While significant, only a select few are potentially deductible for tax purposes. The Internal Revenue Service (IRS) provides specific guidance on which costs may offer a tax benefit.

Closing Costs You Can Deduct

Several specific closing costs can be deducted, offering a tax benefit to homeowners. Loan discount points, also known as discount points, are prepaid interest paid to the lender to reduce the interest rate on the mortgage loan. To be fully deductible in the year they are paid, these points must relate to a mortgage for your primary residence, be an established business practice in your area, and not exceed the amount generally charged. If these conditions are not met, the points may need to be deducted ratably over the life of the loan.

Prepaid mortgage interest, which is the interest paid at closing for the period between the closing date and the first regular mortgage payment, is also deductible. This amount is typically shown on your Closing Disclosure. Real estate taxes paid at closing, including any prorated amounts for the portion of the year you own the home, are generally deductible. However, the deduction for state and local taxes (SALT), including real estate taxes, is limited to $10,000 per household ($5,000 if married filing separately).

Mortgage insurance premiums (MIP or PMI) were previously deductible as qualified residence interest for certain loans. However, this deduction expired at the end of 2021 and is not available for tax year 2024 and beyond unless Congress reinstates it.

Closing Costs You Cannot Deduct

Many closing costs are not tax-deductible because the IRS views them as part of the expense of acquiring the home. Loan fees, such as appraisal fees, loan origination fees (if not considered points), underwriting fees, and credit report fees, generally fall into this non-deductible category. These are considered costs of obtaining the loan, not interest.

Title-related fees are also typically not deductible. This includes charges for a title search and premiums for title insurance policies, both for the lender and the owner. Legal fees paid to an attorney specifically for services related to the closing process, such as preparing the sales contract and deed, are generally not deductible.

Recording fees, which are paid to the local government to officially record the property transfer and mortgage documents, are not deductible. Transfer taxes, sometimes called stamp taxes, imposed by state or local governments on the transfer of real estate, are also typically not deductible. Additionally, home inspection fees, pest inspection fees, and survey fees are generally considered non-deductible expenses.

Closing Costs That Increase Your Home’s Basis

While many closing costs are not immediately deductible, some can be added to your home’s cost basis. Increasing the cost basis reduces the taxable capital gain when you eventually sell the home. This adjustment can be beneficial if your home’s appreciation results in a profit exceeding the capital gain exclusion limits, which are $250,000 for single filers and $500,000 for married couples filing jointly.

Costs that can be added to your home’s basis include abstract fees, which cover the summary of the property’s title history, and charges for installing utility services. Legal fees paid for obtaining title to the home, including those for title search and preparing sales contracts and deeds, also increase the basis. Recording fees, survey fees, and owner’s title insurance premiums are examples of non-deductible closing costs that can be added to the basis. Transfer taxes paid at closing can also be included in the home’s basis.

How to Claim Deductions for Closing Costs

To claim deductible closing costs, taxpayers generally must itemize their deductions on Schedule A (Form 1040) instead of taking the standard deduction. Compare the total of your itemized deductions to the standard deduction amount for your filing status to determine which option provides the greater tax benefit. For the 2024 tax year, the standard deduction is $14,600 for single filers and married individuals filing separately, and $29,200 for married couples filing jointly.

The Closing Disclosure is the primary document that provides a detailed breakdown of all closing costs paid. Refer to this document to identify the specific amounts for deductible items like mortgage interest and real estate taxes. Your mortgage lender will also typically send you Form 1098, which reports the mortgage interest you paid during the year, including any deductible points.

Deductible closing costs are generally claimed in the tax year they are paid. For mortgage interest, including points, the deductible amount is reported on Schedule A. Real estate taxes are reported on Schedule A. While mortgage interest for a second home is also deductible, limitations apply based on the loan amount; for loans originated after December 15, 2017, interest on up to $750,000 of qualified acquisition debt is deductible ($375,000 if married filing separately). For loans originated before this date, the limit is $1 million ($500,000 if married filing separately).