Is Your Title Insurance Tax Deductible?
Understand the tax implications of title insurance beyond simple deductibility. Learn how it affects your property's cost basis and future gains.
When purchasing a home, buyers encounter various expenses beyond the agreed-upon price. Among these, title insurance is a common cost, designed to protect against potential issues with a property’s ownership history. Homeowners and prospective buyers often inquire if this expense qualifies as a deductible item on their federal income tax returns.
The Tax Treatment of Title Insurance
Title insurance premiums are not deductible for tax purposes. This applies to both owner’s title insurance and lender’s title insurance. The Internal Revenue Service (IRS) considers title insurance a capital expense, meaning it is added to the property’s cost basis.
A capital expense like title insurance is incurred to obtain or improve an asset with a useful life extending beyond one year. Instead of being deducted in the year it is paid, the cost of title insurance increases the property’s cost basis.
Adjusting Your Property’s Cost Basis
The cost basis of a property represents its original value for tax calculations, used to determine capital gains or losses when the property is sold. When you purchase a home, your initial cost basis includes the purchase price and certain acquisition costs. These non-deductible costs increase your property’s basis.
Legal fees, recording fees, survey fees, and title insurance are examples of non-deductible closing costs added to the property’s basis. A higher cost basis can reduce the taxable profit when you sell the home, potentially lowering your capital gains tax liability. Keeping records of all expenses that contribute to your property’s basis, including these closing costs and significant home improvements, is important.
Other Deductible Home-Related Expenses
While title insurance is not directly deductible, many other expenses associated with owning a home can provide tax benefits. Mortgage interest is deductible on loans used to buy, build, or substantially improve a primary or second home. For mortgages taken out after December 15, 2017, the deduction is limited to interest on up to $750,000 of mortgage debt, or $375,000 for married individuals filing separately.
Property taxes paid to state and local governments are also deductible. The deduction for state and local taxes (SALT) is capped at $10,000 per household, or $5,000 for married individuals filing separately. Mortgage points, which are prepaid interest paid to obtain a mortgage, can be deducted in the year they are paid if certain conditions are met, particularly for a primary residence. If not fully deductible in the year paid, points may be deducted over the life of the loan.
Individuals who use a portion of their home exclusively and regularly for business purposes may qualify for the home office deduction. This deduction allows for the write-off of certain home expenses, including a percentage of mortgage interest, property taxes, and utilities. Certain home improvements made for medical care can also be deductible as medical expenses if their primary purpose is medical care and they do not increase the home’s value, subject to adjusted gross income limitations.