When you buy, sell or refinance a home, closing costs are an expensive part of the deal. And while most taxpayers should take the standard deduction on itemized deductions from their income taxes to maximize savings, the year you buy or refinance a home can be an exception.

Closing costs can result in tax-deductible expenses that you don’t incur in a regular year of homeownership, and those additional expenses can push you past the threshold where it makes financial sense to detail them.

Are all closing costs tax deductible?

All closing costs are not tax deductible. In general, costs that can be considered as taxes or interest are deductible. But, as you’ll learn below, the IRS classifies certain expenses as interest that the average person doesn’t. You may be able to deduct more closing costs than you think.

Closing costs you can deduct on the purchase of a home

Below we’ll describe the closing costs you can deduct when buying a home, as well as any special considerations that could affect how much you can deduct or in which tax year you can claim. the deduction.

First of all, you need to 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 households, and $ 24,800 for married couples filing jointly and surviving spouses.

Your itemized deductions must exceed these amounts to qualify for the closing cost tax deductions. All of your itemized deductions, including charitable donations, continue Planning a of your annual federal income tax return.

1. Property taxes

National and local property taxes (property taxes) are deductible in the year you pay them. You can only deduct property taxes levied at a similar rate on all real estate in your area for the benefit of general welfare.

You cannot deduct more than $ 10,000 per year ($ 5,000 if you marry separately) in property taxes, sales taxes, and state and local income taxes, combined.

2. Prepaid interest

When your mortgage closes, you’ll have to pay interest for a partial month, unless you close the first of the month.

For example, if you close on March 10, you will owe the lender interest from March 10 to March 31. Then, on April 1, you will make your first regular payment payment of principal and interest. The interest you owe from March 10 to March 31 is called prepaid interest and is deductible 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, purchase, or significantly improve your primary or secondary residence. If you have a large mortgage, be aware that you can only deduct the interest paid on the first $ 750,000 of mortgage debt ($ 375,000 if you are married and filing separately).

Your lender must 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 mortgage interest you pay with your monthly payments, plus any late fees you incur.

3 points

The type of loan point you are probably the most familiar with the type you pay to lower 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:

  • The mortgage is secured by your primary residence.
  • The mortgage is used to buy, build or substantially improve your primary residence.
  • Paying points is an established business practice in your area.
  • You did not pay more points than usual in your region.
  • You are using the cash (not accrual) method of accounting (most people do).
  • The lender didn’t charge you more points in exchange for charging less for anything other than interest.
  • The money you brought to closing was at least equal to the number of points charged by the lender.
  • Points are calculated as a percentage of your loan amount.
  • Your mortgage payment statement clearly shows what you paid in points.

You can even deduct points if the seller pays them, as long as you meet the above conditions. However, when you sell your home, you must remember to reduce the value of the purchase price by any points paid by the seller.

You will likely realize the greatest tax savings by deducting all your points in the year you pay them, if you are eligible. Your other option is to deduct points over the life of your mortgage.

4. Creation costs

IRS classifies mortgage set-up costs like points. You can deduct your loan origination costs even if the seller pays them. These are the fees that lenders charge for underwriting and processing your mortgage.

5. Mortgage insurance premiums

The IRS considers four different types of expenses to be mortgage insurance premiums: private mortgage insurance (PMI), VA financing charges for VA loans, USDA loan warranty costs and FHA loan initial mortgage insurance premiums. The mortgage loan insurance deduction is constantly being removed and renewed, so check the law before you claim it.

Mortgage default insurance can be paid monthly, in a lump sum at closing, or in a lump sum that you finance with your mortgage. The IRS says that for a flat fee, you can deduct the full amount in the year you close your mortgage, whether you pay the fee in cash or fund it.

This deduction is also subject to income limits. The mortgage loan insurance premium deduction disappears once your Adjusted Gross Income (AGI) is greater than $ 100,000 (whether you are married or single; $ 50,000, if you are married and filing separately). You cannot claim the deduction at all once your AGI exceeds $ 109,000 ($ 54,500 if you are married and file separately).

Non-tax deductible closing costs on the purchase of a home

Only mortgage interest and property taxes are potential deductions. This means that the following fees are not tax deductible:

Closing costs you can deduct on a house sale

Door-to-door sellers also pay closing costs, and those fees can dramatically reduce the proceeds of the sale. So it’s good to know a few ways to keep more of that money in your pocket.

If you’ve lived in your home for two of the past five years, you don’t have to pay tax on the first $ 250,000 of profits from the sale of your home if you’re single, or $ 500,000 if you’re married . These amounts are exemptions, which give you much greater tax savings than deductions.

If you sell your house for more than $ 250,000 ($ 500,000 if you are married) more than you bought it, anything you can do to increase the base price of your house will lower your income tax. capital gains on the profit from the sale of your home. The basis of your home is the purchase price plus the costs you paid to maintain, improve, and sell your home.

Some of the closing costs that you cannot deduct as a buyer or seller can be added to your home’s base price, including:

  • Title search and title fee summary
  • Installation costs of utilities
  • Legal fees
  • Registration fees
  • Survey fees
  • Transfer or stamp fees
  • Owner’s title insurance

You can also add these sales charges to your base:

  • Real estate agent commissions
  • Advertising expenses
  • Legal fees
  • Loan fees you paid on behalf of the buyer
  • Any other fees or costs you incurred in selling your home, such as staging fees

Credit report, assessment and home insurance the charges cannot be added to the base price of your home, nor are they deductible.