Are Closing Costs Tax Deductible? Which Ones?

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

Closing costs definition

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 with WinCap Financial 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:

Are closing costs tax-deductible?

Some might be. 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 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 (PMI): If your down payment is less than 20 percent of the home’s purchase price, 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.

What closing costs are not tax-deductible?

It’s a safe bet that the rest of your closing costs will not be 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, a CPA and head of tax/director of tax advisory and planning for Edelman Financial Engines. “But they can be added to your basis price when it’s time to sell your home.”

Bottom line

Some closing costs can be tax deductible, but not all, and it can be complicated. 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. When in doubt, ask a financial planner, accountant or tax expert for guidance.