What Closing Costs Are Tax Deductible?
Gain clarity on the tax deductibility of real estate closing costs. Learn which expenses can offer tax benefits for homeowners.
Closing costs are fees paid during a real estate transaction, in addition to the purchase price. Understanding their potential tax impact is important for homeowners. The tax deductibility of closing costs is not uniform and depends on the specific type of fee incurred during the transaction.
Deductible Closing Costs
Certain closing costs provide tax benefits, typically in the year a home is acquired or refinanced. These costs generally relate directly to the financing of the home or certain property-related taxes.
Mortgage interest, including prepaid interest often referred to as “points,” is deductible. Points can often be fully deducted in the year of purchase if certain conditions are met, such as being a customary practice in the area and related to the acquisition of your main home. For loans originated after December 15, 2017, the deduction for mortgage interest applies to the first $750,000 of mortgage debt. For loans taken out before this date, the limit is higher, applying to the first $1 million of mortgage debt.
Real estate taxes paid at closing are also deductible. This includes any portion of property taxes that covers the period you own the home, even if paid upfront during the settlement process. These taxes must be assessed uniformly across properties and used for general government purposes to qualify for the deduction.
Mortgage insurance premiums (MIPs or PMI), which protect lenders in situations where a borrower makes a small down payment, were historically deductible. However, this deduction expired after the 2021 tax year, so these premiums are generally not deductible for current tax years.
Non-Deductible Closing Costs
Many closing costs are not tax-deductible in the year they are paid. These fees are generally considered part of the overall expense of acquiring the property and do not qualify for an immediate tax write-off. Examples include appraisal fees, which cover the cost of valuing the property, and attorney fees for legal services related to the transaction.
Other non-deductible expenses include home inspection fees, which assess the property’s condition, and title insurance premiums, which protect the buyer and lender from title defects. Lender’s fees, such as loan origination fees, underwriting fees, and document preparation fees, are not deductible, unless they qualify as points. Recording fees, paid to the local government to record the property transfer, are also not deductible.
While these costs are not deductible, many can be added to the property’s cost basis. The cost basis represents the original cost of the property plus certain expenses incurred to acquire and improve it. Increasing the cost basis is beneficial because it reduces the taxable capital gain when the property is eventually sold, potentially lowering your future tax liability.
Claiming Deductible Costs
To claim deductible closing costs, taxpayers must itemize their deductions on Schedule A (Form 1040) of their federal income tax return. This means that the total of all itemized deductions must exceed the standard deduction amount for your filing status to provide a tax benefit. The standard deduction has been substantially increased in recent years, leading fewer taxpayers to itemize.
Mortgage interest, including points, is reported on Schedule A. Your mortgage lender will provide Form 1098, a Mortgage Interest Statement, which details the amount of interest and any points paid during the year. Lenders are required to issue this form if you paid $600 or more in mortgage interest.
Real estate taxes are also reported on Schedule A. However, there is a limitation on the deduction for state and local taxes (SALT), which includes real estate taxes, state income taxes, or state sales taxes. For tax years starting in 2025, this deduction is capped at $40,000 for single filers and those married filing jointly, and $20,000 for married individuals filing separately. This cap was previously $10,000 and is subject to further adjustments.
It is important to maintain thorough records of all closing documents, such as your Closing Disclosure or HUD-1 statement, as these documents provide the necessary details for claiming eligible deductions. These records are essential for accurately preparing your tax return and for substantiating your deductions if queried by the IRS.