Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Written By Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Personal Finance Expert Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Updated: Jul 19, 2023, 6:32am
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When you buy, sell or refinance a home, closing costs are a pricey part of the transaction. And while most taxpayers should take the standard deduction over itemizing deductions on their income taxes to maximize savings, the year you purchase or refinance a home may be an exception.
Closing costs can result in tax-deductible expenses that you don’t incur in a regular year of homeownership, and those extra expenses can push you over the threshold to where it makes financial sense to itemize.
Not all closing costs are tax deductible. In general, costs that can be considered taxes or interest are deductible. But, as you’ll learn below, the IRS classifies some expenses as interest that the average person doesn’t. You may be able to deduct more closing costs than you think.
We’ll outline below the closing costs you can deduct on a home purchase, as well as any special considerations that might affect how much you can deduct or in what tax year you can claim the deduction.
First, you should know the current standard deduction amounts. For 2020 tax returns filed in 2021, the standard deduction is $12,400 for individuals, $18,650 for heads of household and $24,800 for married couples filing jointly and surviving spouses.
Your itemized deductions need to exceed these amounts to benefit from closing cost tax deductions. All your itemized deductions, including charitable donations, go on Schedule A of your annual federal tax return.
State and local real estate taxes (property taxes) are deductible in the year you pay them. You can only deduct property taxes that are levied at a similar rate on all the real estate in your area to benefit the general welfare.
You can’t deduct more than $10,000 per year ($5,000 if married filing separately) in property taxes, sales taxes and state and local income taxes—combined.
When you close on your mortgage, you will have to pay interest for a partial month unless you close on the first of the month.
For example, if you close on March 10, you will owe the lender interest for March 10 through March 31. Then, on April 1, you will make your first regular principal and interest payment. The interest you owe for March 10 through March 31 is called prepaid interest, and it’s deductible just like other mortgage interest.
For mortgage interest to be deductible, the mortgage must be secured by your home, and the proceeds must be used to build, buy or substantially improve your primary residence or second home. If you’re taking out a large mortgage, be aware that you can only deduct interest paid on the first $750,000 of mortgage debt ($375,000 if married filing separately).
Your lender should report all the interest you pay for the year on IRS Form 1098. If you pay less than $600 in interest, your lender doesn’t have to report it, but you can still deduct it. You can also deduct the mortgage interest you pay with your monthly payments, as well as any late fees you incur.
The type of loan point you’re probably most familiar with is the type you pay to reduce your interest rate. The IRS considers these “discount points” to be prepaid interest, which generally makes them tax deductible in the year you pay them if you meet these conditions:
You can even deduct points if the seller pays them, as long as you meet the conditions above. However, when you sell your home, you’ll have to remember to reduce the value of the purchase price by any points the seller paid.
You will probably achieve the greatest tax savings by deducting all your points in the year you pay them, if you’re eligible to do so. Your other option is to deduct points over the life of your mortgage.
The IRS classifies mortgage origination fees as points. You can deduct your loan origination fees, even if the seller pays them. These are the fees that lenders charge for underwriting and processing your mortgage.
The IRS considers four different types of expenses to be mortgage insurance premiums: private mortgage insurance (PMI), VA funding fees for VA loans, USDA loan guarantee fees and FHA loan up-front mortgage insurance premiums. The mortgage insurance deduction is constantly phasing out and getting renewed, so check the current law before you claim it.
Mortgage insurance can be paid monthly, in a lump sum at closing or in a lump sum that you finance along with your mortgage. The IRS says that for a lump sum fee, you can deduct the entire amount in the year you close on your mortgage, whether you pay the fee in cash or finance it.
This deduction also is subject to income limits. The mortgage insurance premium deduction phases out once your adjusted gross income (AGI) is more than $100,000 (whether you’re married or single; $50,000, if you’re married and file separately). You can’t claim the deduction at all once your AGI is more than $109,000 ($54,500 if you’re married filing separately).
Home mortgage interest and certain real estate taxes you paid at closing can be tax-deductible.
Qualifying expenses include:
Unfortunately, many closing costs, including homeowners association assessments, transfer taxes and lender fees, can’t be deducted.
You may also need to consult with your tax advisor to determine if you can deduct the full amount of paid mortgage points in the current tax year. Despite being prepaid interest, the IRS states that taxpayers typically deduct this expense over the mortgage’s term.
Additionally, you’ll need to file an itemized tax return to deduct most qualifying closing costs. This can be challenging, as most taxpayers claim the standard deduction.
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