Congratulations on your new home! As you settle in, you might be wondering: what closing costs are tax deductible? Understanding this can help you make the most of your tax return.
Are Closing Costs a Tax Deduction?
When you buy a home, you typically pay a variety of fees known as closing costs or settlement costs. These can include loan origination fees, title insurance, appraisal fees, and more. But are closing costs a tax deduction? The answer is: some are, but most are not.
Tax Deductions for Closing Costs
According to the IRS, the only closing costs tax write off you can claim in the year you purchase or build your home are:
- Mortgage interest (including points paid to reduce your interest rate)
- Real estate (property) taxes
These tax deductions for closing costs are only available if you itemize your deductions on your tax return.
Example 1: Deductible Mortgage Interest
If you paid $3,000 in mortgage interest and $2,000 in points (prepaid interest) at closing, you may be able to deduct the full $5,000 on your Schedule A.
Example 2: Deductible Property Taxes
If your closing disclosure shows that you prepaid $1,200 in property taxes, that amount may also be deductible.
What Closing Costs Are Not Deductible?
Most other closing costs are not immediately deductible, including:
- Title insurance
- Appraisal fees
- Attorney fees
- Home inspection costs
- Recording fees
However, these costs may still benefit you. You can add them to your home's cost basis, which could reduce your capital gains tax when you sell the home.
How to Deduct Closing Costs Taxes
To deduct closing costs taxes, you’ll need to:
- Itemize deductions using Schedule A (Form 1040).
- Keep detailed records of your closing disclosure (HUD-1 or Closing Disclosure form).
- Consult IRS Publication 530 for the most up-to-date guidance.