Did you sell your home this year? Thinking of Buying One?
Being able to deduct closing costs is one of the many benefits of real estate.
The only settlement or closing costs you can deduct on your tax return for the year the home was purchased or built are Mortgage Interest and certain Real Estate (property) taxes. These can be deducted in the year you buy your home if you itemize your deductions.
As per IRS publication 530, homebuyers may deduct certain closing costs when they file federal tax returns. These include the points, or loan origination fees, you paid, as well as property taxes and mortgage interest.
When you’re filing your taxes, there’s a whole lot to consider. From figuring out who counts as a dependent to organizing your income streams, you may find the process a bit overwhelming. And if you’re a new homeowner tackling mortgage payments, there’s another key question you’ll want to know the answer to this tax season as you try to lower your tax liability: Are closing costs deductible on your recent home purchase? Below, we give you the rundown:
Simple Question: Are Closing Costs Tax-Deductible?
Simple answer: it depends. Homeowner tax deductions can be very difficult to calculate, given all the varying factors that go into the equation. So to find out whether the closing costs on your particular home purchase make the cut, check out what the IRS says in its tax deduction breakdown in Form 1040 and on its website. As with all possible tax deductions, beyond just home-related ones, it is the responsibility of the taxpayer to report each of the taxes and fees related to the purchase as itemized deductions. Also with all possible tax deductions, your first priority is most likely to save money and earn tax advantages. For this purpose, do the groundwork: research whether taking a standard deduction versus deducting your closing costs would save you the most. Then choose accordingly.
Which Particular Closing Costs Can You Deduct?
You can’t completely deduct all the costs of closing on your house. Only a few eligible ones make the cut. The IRS denotes the following as deductible costs:
- Sales tax issued at closing
- Real estate taxes charged to you when you closed
- Mortgage interest paid when cost was settled
- Real estate taxes that were paid for by the mortgage lender
- The interest you paid at the house’s purchase
- Loan origination fees (a.k.a. “points”). These would be written as a percentage of the borrowed money.
Variation exists among these costs, and each house purchase carries different rules. Be sure to double check whether your needs fit with these, and reach out to your lender or advisor if you’re not sure.
Loan Origination Fees
When thinking about whether closing costs are tax deductible, it’s important to understand the role of loan origination fees, or points. Lenders charge loan origination fees in return for their underwriting your mortgage. The service includes identity, credit card and paperwork verification and preparation, and it is crucial for closing on the deal. This fee will come out to about 1% of your mortgage.
Loan origination fees are important to consider, because sometimes they can be tax-deductible if you purchased your home within a year of filing the taxes. The IRS will let you deduct these fees but only for certain reasons. Those include if the loan is for your primary place of residence, if you used the loan to buy this primary residence and if you didn’t pay the loan in place of additional fees for appraising the home or paying for an attorney or property taxes.
Which Closing Costs Are Completely Non-Deductible?
Although there are some recognized loopholes—ways to get a tax-deductible status on various costs of closing on your house—there are still many costs that are strictly non-deductible. They are as follows:
- Pre-move-in utilities charges
- Fire and flood insurance or certificates
- Pre-closing rent (if you moved in early)
- Mortgage refinancing
- Title fees
- Real estate commissions
- Costs of appraisal
- Home inspections
- Costs of reporting credit
- Transfer taxes
- Attorney fees
These non-deductible attributes are added to the cost of the property. You should note them on your Form 1040. For a complete list, consult the IRS tax policy list, which you can find on the agency’s website. Another important point: The higher your income is, the less you can deduct from your income taxes.
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If you have a tax question not answered by this publication or How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics using the search feature or by viewing the categories listed.
Getting tax forms, instructions, and publications.
Visit IRS.gov/Forms to download current and prior-year forms, instructions, and publications.
Ordering tax forms, instructions, and publications.
Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. Your order should arrive within 10 business days.
Useful Items – You may want to see:
- 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments
- 523 Selling Your Home
- 525 Taxable and Nontaxable Income
- 527 Residential Rental Property
- 547 Casualties, Disasters, and Thefts
- 551 Basis of Assets
- 555 Community Property
- 587 Business Use of Your Home
- 936 Home Mortgage Interest Deduction
Form (and Instructions)
- Schedule A (Form 1040 or 1040-SR) Itemized Deductions
- 5405 Repayment of the First-Time Homebuyer Credit
- 5695 Residential Energy Credits
- 8396 Mortgage Interest Credit
- 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
See How To Get Tax Help , near the end of this publication, for information about getting publications and forms.
Publication 530 – Main Contents
What You Can and Can’t Deduct
To deduct expenses of owning a home, you must file Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, and itemize your deductions on Schedule A (Form 1040 or 1040-SR). If you itemize, you can’t take the standard deduction.
This section explains what expenses you can deduct as a homeowner. It also points out expenses that you can’t deduct. There are four primary discussions: state and local real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums.
Generally, your real estate taxes and home mortgage interest are included in your house payment.
Your house payment.
If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are state and local real estate taxes actually paid to the taxing authority and interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.
Some nondeductible expenses that may be included in your house payment include:
- Fire or homeowner’s insurance premiums, and
- The amount applied to reduce the principal of the mortgage.
Minister’s or military housing allowance.
If you are a minister or a member of the uniformed services and receive a housing allowance that isn’t taxable, you still can deduct your real estate taxes and your home mortgage interest. You don’t have to reduce your deductions by your nontaxable allowance. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Pub. 3, Armed Forces’ Tax Guide.
You can’t deduct any of the following items.
- Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance.
- Wages you pay for domestic help.
- The cost of utilities, such as gas, electricity, or water.
- Most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information.
- Forfeited deposits, down payments, or earnest money.
Hardest Hit Fund and Emergency Homeowners’ Loan Programs
You can use a special method to figure your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions.
- You received assistance under:
- A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or
- An Emergency Homeowners’ Loan Program administered by the Department of Housing and Urban Development (HUD) or a state.
- You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home.
If you meet these conditions, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown in box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown in box 1 (mortgage interest received), box 5 (mortgage insurance premiums), and box 10 (real property taxes) of Form 1098, Mortgage Interest Statement.
You may first allocate amounts paid to mortgage interest up to the amount shown on Form 1098. You may then use any reasonable method to allocate the remaining balance of the payments to real property taxes. Regardless of how you determine the deductible amount under this special safe harbor method, any amount allocated to state or local property taxes is subject to the limitation on the deduction for state and local taxes. However, you aren’t required to use this special method to figure your deduction for mortgage interest and real estate taxes on your main home.
For additional guidance, see Notice 2018-63, available at IRS.gov/irb/2018-34_IRB#NOT-2018-63.
State and Local Real Estate Taxes
Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or special service rendered to you.
The deduction for state and local taxes, including real estate taxes, is limited to $10,000 ($5,000 if married filing separately). See the Instructions for Schedule A (Form 1040 or 1040-SR) for more information.
Deductible Real Estate Taxes
Real estate taxes imposed on you can be deducted closing costs. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, see Special Rules for Cooperatives , later.
Where to deduct real estate taxes.
Enter the amount of your deductible state and local real estate taxes on Schedule A (Form 1040 or 1040-SR), line 5b.
Real estate taxes paid at settlement or closing.
Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible if you itemize your deductions. You can deduct these closing costs.
Division of real estate taxes.
For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.
You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct closing costs of your own share, if you itemize deductions, for the year the property is sold.
Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you can’t deduct those closing costs. You treat them as part of the cost of your home. See Real estate taxes , later, under Basis.
Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.
Refund or rebate of real estate taxes.
If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Pub. 525, Taxable and Nontaxable Income.
Still Not Sure How to Deduct Closing Costs?
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