Which Closing Costs Are Tax Deductible?

Closing costs are fees associated with purchasing or refinancing a property, beyond the down payment. These costs can include charges for loan origination, appraisals, and title insurance. Only a few closing costs are tax-deductible in the year the home is acquired. Understanding which costs qualify is important for maximizing potential tax benefits.

Closing Costs You Can Deduct Immediately

Some closing costs are immediately deductible. These include prepaid mortgage interest (points) and real estate taxes. These deductions apply to both home purchases and refinances, with specific rules.

Mortgage interest, including points, is deductible. Points are prepaid interest paid to a lender at closing for a lower mortgage rate. For a home purchase, points are fully deductible in the year paid if the loan is for your primary residence and the points are customary for your area. Points on a refinance loan are not fully deductible in the year paid; they must be deducted over the loan’s life. For example, if you pay $3,000 in points on a 30-year refinance, you would deduct $100 each year. Your lender reports mortgage interest and points paid on Form 1098, essential for claiming these deductions.

Real estate taxes (property taxes) are also deductible. Property taxes are often prorated between buyer and seller at closing. Only the portion covering your ownership period is deductible. This means if you close on a home in October, you can only deduct the property taxes for October, November, and December.

Closing Costs That Add to Your Home’s Basis

Many closing costs are not immediately deductible but increase your home’s cost basis. The cost basis is the original cost of the property, plus certain improvements. Increasing your home’s cost basis reduces the taxable gain when you sell, leading to a smaller capital gains tax.

Closing costs that add to your home’s basis include appraisal fees. Attorney fees for title transfer also add to basis. Home inspection fees contribute to the basis. Other expenses that increase your basis include:

Lender’s title insurance
Owner’s title insurance
Recording fees
Transfer taxes
Survey fees
Underwriting fees
Credit report fees

Claiming Your Closing Cost Deductions

To claim most deductible closing costs, like mortgage interest and property taxes, taxpayers must itemize deductions on Schedule A (Form 1040). Itemizing is only beneficial if your total itemized deductions exceed the standard deduction for your filing status. The Tax Cuts and Jobs Act of 2017 increased standard deduction amounts, making itemizing less common.

Your mortgage lender provides Form 1098, Mortgage Interest Statement, reporting mortgage interest and points paid. For property taxes, refer to your closing disclosure (CD) or HUD-1 settlement statement.

Maintain thorough records. Keep your closing disclosure or HUD-1 statement, as it lists all closing costs and helps identify deductible items and those that add to basis. These records are necessary if audited by the IRS. While tax software can assist, consult a qualified tax professional for complex situations to ensure correct deductions.