Can You Write Off Closing Costs on Your Taxes?
Explore which closing costs may be tax-deductible and learn how to document and report them effectively on your tax returns.
When purchasing a home, closing costs can be a significant expense. These fees cover various charges related to finalizing a real estate transaction and often leave new homeowners wondering if any part of these expenses can be deducted on their taxes.
Understanding which components of closing costs are deductible is key to maximizing tax benefits.
Potentially Deductible Fees
Navigating tax deductions for closing costs requires familiarity with the Internal Revenue Code (IRC). While not all closing costs are deductible, certain fees can reduce taxable income. For example, mortgage interest, including prepaid interest often called “points” or “loan origination fees,” is deductible under IRC Section 163. These points must meet specific IRS criteria, such as being paid directly to the lender, used to buy or build a primary residence, and being customary in the area.
Property taxes are another deductible expense. Under IRC Section 164, state and local property taxes paid at closing qualify for deductions, though they are subject to a $10,000 cap introduced by the Tax Cuts and Jobs Act of 2017. Homeowners should ensure these taxes are itemized on their settlement statement to claim the deduction.
Mortgage insurance premiums may also be deductible under certain conditions. This deduction, extended through 2024, can be claimed as an itemized deduction on Schedule A. However, it phases out for taxpayers with an adjusted gross income above $100,000 ($50,000 if married filing separately).
Non-Deductible Charges
Not all closing costs are deductible. Real estate agent or broker commissions, typically a percentage of the home’s purchase price, are considered transaction costs and do not qualify for deductions.
Homeowner’s insurance premiums, essential for protecting your property, are classified as personal expenses and are not deductible. Similarly, fees for obtaining a credit report or appraisal are non-deductible. While necessary for the home-buying process, these expenses do not provide tax relief.
Title insurance fees and legal costs, such as preparing the deed or obtaining legal advice, are also non-deductible. These are considered part of the transaction costs and are not eligible for deductions.
Documenting Your Expenses
Accurate documentation of expenses is critical for tax preparation, particularly for closing costs. The IRS requires detailed records to substantiate deductions, making it essential to organize and retain all relevant documents. The settlement statement, or Closing Disclosure, outlines the costs incurred during the transaction and helps identify deductible expenses.
Homeowners should also keep copies of receipts, invoices, or statements related to mortgage and property payments, such as prepaid interest or property taxes. Digital storage solutions, like cloud services, can help organize and secure these records, simplifying tax preparation and any future IRS inquiries.
Reporting on Tax Returns
When reporting closing costs on tax returns, accuracy is essential. Homeowners must determine which deductions apply to their situation based on expenses incurred during the home purchase. Form 1040, Schedule A, is used to itemize deductions. Itemizing is only beneficial if total deductions exceed the standard deduction, which varies by filing status.
Understanding tax codes like IRC Section 163 for mortgage interest and Section 164 for property tax deductions can help ensure compliance and avoid errors. Taxpayers should also account for caps or phase-out limits that might affect their deductions, as these can impact overall tax savings.