Which Closing Costs are Tax Deductible?

Buying a home involves a number of closing costs above and beyond the price of the home. After all, a typical real estate transaction involves a lot of people performing the services required to obtain a mortgage and transfer title, some of whom you never even meet.  Of course, these services typically require fees.  And then there are transaction taxes, transfer taxes, and so on.

Most of the time, the question is not asked at the time of the purchase because there are so many other pressing things to consider; but at some point, typically around tax time, the question comes up: “are closing costs tax deductible?”  The answer is not as simple, unfortunately.

The IRS has rules on which closing costs are deductible and sometimes those rules may be hard to decipher.  The information here is meant to be an overview.  It may or may not be relevant to your particular situation. Also, keep in mind that these rules may change and any changes made may not be reflected here. I always advise that you speak to a tax professional if you have any questions about your specific situation.

Deductible Closing Costs

Keep in mind that closing costs may only be deducted if you itemize your deductions.  If you take the standard deduction you will not be able to itemize your closing costs.  If you do itemize, here are the costs that are deductible:

  • Home mortgage interest paid at settlement, known as per diem interest
  • Some real estate taxes paid at settlement; the following ARE NOT deductible:
    • Charges paid to the taxing authority for services provided
    • Taxes paid for local benefits that increase the value of the home
    • Transfer taxes or tax stamps
    • HOA assessments or fees
  • Real estate taxes paid throughout the tax year
  • Mortgage interest paid throughout the tax year
  • Any sales taxes paid at closing

Points (origination fees and discount points)

Points are one-time closing costs that typically result in a lower interest rate over the life of the loan.  If you paid any points at closing they will likely be deductible, but the deduction might have to be spread out over the life of the loan, not all in one year.  In order for you to have the option of deducting points in one lump sum, you must meet the following criteria:

  • The loan is for your primary residence
  • The amount of points you paid is typical for your area
  • Points were not paid in lieu of other fees (appraisal fee, title fees, etc.)
  • The cash you paid out of pocket before or at closing, including any points the seller paid, were equal to or greater than the points you were charged
  • The points were calculated as a percentage of the mortgage principle
  • The points are clearly disclosed on the closing disclosure

Again, I must recommend that you consult a tax professional if you have any questions about your specific situation. Unfortunately, that is not an area that I have the expertise to help you with. If you worked with me to obtain the mortgage in question and need any documentation from your closing, I can certainly help with that.  As always, if there is anything I can do for you, please do not hesitate to contact me at your convenience.