Are closing costs tax deductible?

When you close on a home purchase or mortgage refinance, you’ll have to pay various closing costs. From appraisals and home inspections to loan origination fees and property taxes, closing costs can really add up. But, depending on your situation, some of those expenses may qualify as tax deductions. Here’s a look at what closing costs are, and are not, tax deductible.

What are closing costs?

When you purchase a home, you’ll be on the hook for a variety of fees and expenses. These will vary depending on your loan type and amount. Buyers are usually responsible for paying most of the closing costs in a transaction, but sellers incur closing costs as well, and who pays for what is often negotiable.

“On average, closing costs on a primary mortgage purchase loan are between 2 and 5 percent of the loan amount,” says Michael Collins, a chartered financial analyst and professor at Endicott College in Beverly, Massachusetts. “For a refinance loan, they are typically 3 to 6 percent of the loan amount.”

Common closing costs include:

• Origination, underwriting, application and credit report fees charged by the lender.
• The cost of a professional home inspection.
• The cost of a professional appraisal.
• Fees paid for a title search and title insurance.
• Any outstanding property taxes.
• Mortgage or discount points, paid to the lender to lower your interest rate.

Tax deductible closing costs

In general, most closing costs are not tax deductible. This is because the IRS regards them as part of the expense of purchasing a home and not a cost related to the use of the home. Still, there are a few closing costs that may be deductible (always check with a tax professional to be sure):

• Mortgage interest: Per the IRS, you can deduct home mortgage interest on the first $750,000 of your loan, or $375,000 if married and filing separately. However, higher limitations of $1 million, or $500,000 if married and filing separately, apply if the debt was incurred before Dec. 16, 2017. You are allowed to deduct your mortgage interest payments every year, provided you still own your home. Use Bankrate’s mortgage tax deduction calculator to get an idea of how much you can deduct.
• Mortgage points: The IRS considers mortgage points to be prepaid interest, and thus deductible. However, there are nine distinct eligibility criteria criteria that must be met to deduct the entirety of the points paid at once, on the year that you paid them. If you don’t meet these criteria, the points may still be deductible, but that deduction would be made over the life of your loan, rather than the year you paid for the points.
• Private mortgage insurance: If your down payment is less than 20 percent of the home’s cost, you will likely need to pay for PMI. But you might be allowed to deduct any PMI you pay.
• Property taxes: You can typically deduct your annual property taxes, as well as any portion of the property taxes you paid at closing. But be aware that the IRS puts caps on these amounts. Married couples can deduct a maximum of $10,000 per year in property taxes, or $5,000 for those married and filing separately.
• Distressed property costs: If you buy a distressed property, some of the costs related to fixing, repairing or maintaining it could be tax-deductible.

Tax-deductible closing costs can be taken in the year you pay them, over the life of your mortgage loan or when you sell your home. When you sell your home, it’s considered being “added to your basis,” or the total expenses you paid at the time your property was bought. Taxpayers can choose to calculate their specific deductions and itemize them on their taxes, or they can claim a standard deduction without itemizing.

“The standard deduction for a married couple filing jointly is currently $25,900, or $12,950 for a single filer,” says Andrew Latham, a certified financial planner. “If your total itemized deductions, including mortgage interest and property tax deductions, are less than the standard deduction amount, it would be better to claim the standard deduction.”

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, enacted in 2017, changed the tax code, including new rules and limitations related to tax-deductible closing costs.

“One of the most significant changes made was the increase in the standard deduction,” says Latham. “This means that fewer taxpayers will itemize their deductions, including closing costs and mortgage-related expenses. As a result, many homeowners may no longer be able to deduct their mortgage interest and property taxes.”

For best advice on if, when and how to deduct eligible closing costs, enlist the help of an experienced tax professional.

Closing costs that are not tax deductible

It’s a safe bet that all the rest of your closing costs paid are not tax deductible, including charges for things like home inspections, appraisals, title searches, document prep and more. Likewise, most housing-related bills aren’t tax-deductible, such as your homeowners insurance premiums, utility payments and upkeep and repair expenses.

“Abstract fees, utility fees, legal fees, recording fees, surveys, transfer taxes and title insurance are not tax-deductible,” says Eric Bronnenkant, head of tax for Betterment and adjunct professor at Seton Hall University. “But they can be added to your basis price when it’s time to sell your home.”

Bottom line

Some closing costs are tax deductible, but not all, and it can be complicated. Determining whether or not to deduct eligible closing costs from your taxes will require some math and careful thought. When in doubt, ask a financial planner, accountant or tax expert for assistance. After the deal is closed, be sure to hold on to all of the paperwork: You may need these documents to calculate your eligible tax deductions — and to answer any questions that may arise if you are ever audited by the IRS.