Are closing costs tax deductible?

Buying a house involves more than coming up with a down payment and securing a mortgage. When you reach the closing table, expect your lender and other parties to take fees that can amount to several thousand more dollars. These are called closing costs and they can be an annoying burden for homebuyers.

However, homeownership comes with tax benefits that can provide some relief to the financial burden of buying a home. Fortunately, those tax benefits can extend to some — but not all — your closing costs as well.

Tax-deductible closing cost: What does it mean?

When you buy a home, the transaction includes closing costs, which are how lenders and third parties like real estate attorneys and title insurance providers get paid. These costs appear itemized on a Closing Disclosure form at least three business days before closing so you know exactly what to expect to pay. Buyers and sellers are both responsible for their own set of costs.

A tax deduction is an expense that you may subtract from your annual income when you calculate the taxes you owe. Generally, when you lower your income, you lower your tax bill, so deductions are helpful. 

Homeowners receive two primary federal tax deductions: the mortgage interest deduction and property tax deduction. They may also claim a substantial portion of capital gains as non-taxable income after selling a home. You may also benefit from a number of federal tax deductions related to closing costs. In order to benefit, you  need to itemize your deductions instead of claiming the standard deduction 

Which closing costs are tax-deductible?

Certain closing costs are tax-deductible. You should always consult a tax professional for specific guidance because not all situations are equal. You can usually deduct the following costs and fees on your tax return:

Discount points or origination fees when buying your home

The IRS refers to charges paid to take out a mortgage as “mortgage points.” For these costs to be tax-deductible in the same year you pay them, you must meet all of these conditions:

• You used the mortgage to purchase or build your primary home
• You didn’t pay for discount points in lieu of closing costs like appraisal fees, inspection fees, and property taxes
• You have proof that you or the seller paid the mortgage points
• Your primary home secures the loan
• Points were calculated based on the loan’s principal amount
• The payment amount is shown on your closing disclosure or settlement statement
• Paying points is an established practice in the area where the loan was taken out

If you paid points on a home improvement cash-out refinance, you could also deduct the amount paid to refinance. Then, you must document that all of the cash was used for renovations while also meeting the requirements above.

You can choose to take these tax deductions in the same year you bought your home, deduct them over the life of your loan, or incorporate them to your cost basis when you sell the home, which we’ll discuss later.

Property taxes paid upfront

You may always deduct property taxes and when you take out a mortgage loan, you’ll usually pay some property taxes upfront. Lenders will create an escrow account for a borrower to pay your monthly mortgage payment, which includes your property taxes and homeowners insurance. Your lender takes care of paying these dues on your behalf by dipping into the escrow account.

Only some people pay property taxes at the closing table, but if you do, you may claim them as a tax deduction in addition to the property taxes you paid throughout the year.

Mortgage insurance

Usually, when you take out a loan with a down payment less than 20%, you’ll have to get private mortgage insurance (PMI). This is insurance that protects the lender in the event that you default on the loan.

If you bought a home before or during 2021, these premiums are deductible.

Government-backed loan fees

While conventional loans are stricter about writing off PMI, government-backed loans are much more generous. Items like Federal Housing Administration (FHA) mortgage insurance, VA funding fees, or guarantee fees on USDA-backed loans are tax-deductible. 

What closing costs are deductible when selling a house?

Unfortunately, most closing costs are not tax-deductible for home sellers, but they can provide you with a tax advantages in other ways. These include:

• Homeowners insurance premiums
• Monthly principal payments
• Home appraisal fees
• Title insurance and fees
• Legal and recording fees
• Property survey fees
• Utility costs
• Transfer taxes
• Abstract fees
• Credit check fees
• Property taxes paid on behalf of the home seller
• Real estate fees

You may be able to get a tax break on capital gains when selling your house, by adding these mortgage closing fees to the cost basis of your home, thereby lowering the amount of profit you make. 

For instance, if you’re single and you bought your home for $300,000 but sold it five years later for $560,000, you’d typically owe capital gains tax on the final $10,000 of your $260,000 profit. Writing your initial closing costs into your cost basis could lower your profit amount below $250,000, saving you the capital gains tax.