Which Closing Costs Are Actually Tax Deductible?
By Colleen Kamolnik
Which Closing Costs Are Actually Tax Deductible?
You finally found your house. You've negotiated the price, secured financing, and you're getting ready for closing.
Then you receive your closing disclosure.
And there are a LOT of numbers on that document!
Between lender fees, title insurance, appraisal charges, prepaid interest, and property taxes, it's easy to assume some of those expenses must be tax deductible.
But here's what I tell clients: Just because you paid an expense to purchase your home doesn't necessarily mean you can deduct it.
In fact, closing costs generally fall into three categories.
1. Expenses That May Be Tax Deductible
There are a few expenses worth looking at closely.
Mortgage interest
If you pay qualifying mortgage interest at closing, that interest may be deductible if you itemize your deductions.
For example, if you close in the middle of the month, you may pay prepaid interest covering the remaining days of that month.
Property taxes
Your portion of qualifying property taxes may also be deductible, subject to the applicable state and local tax deduction limits.
Remember, property taxes are generally allocated between the buyer and seller based on the ownership period. Just because an amount appears on your closing statement doesn't necessarily mean the entire amount belongs to you for tax purposes.
Mortgage points
Certain mortgage discount points may qualify for a deduction, sometimes entirely in the year paid and sometimes over the life of the loan.
We'll cover those separately because the rules deserve their own discussion.
And remember, even if an expense qualifies as deductible, you generally need to itemize to receive a federal tax benefit.
2. Expenses That May Help You Later
This is the category I think homeowners overlook most often.
Some closing costs aren't deductible today, but they may increase your home's tax basis.
Examples can include:
Owner's title insurance
Certain attorney and title search fees
Recording fees related to purchasing the property
Property surveys
Transfer and stamp taxes
Why does this matter?
Because when you eventually sell your home, your adjusted cost basis is used to calculate your gain.
Let's use the same example we've been following throughout this series.
You purchase land for $100,000, spend $350,000 constructing your home, and incur another $5,000 in qualifying acquisition and construction costs not already included in those amounts.
Your starting tax basis could be:
Land purchase $100,000
Home construction $350,000
Additional qualifying costs $5,000
Total starting tax basis $455,000
That $5,000 isn't necessarily deductible today, but it may reduce your taxable gain when you eventually sell.
It's not an immediate deduction, but it can still matter.
3. Expenses That Generally Aren't Deductible
Now for the expenses that usually don't provide a personal income tax deduction.
These can include:
Homeowners insurance premiums
Credit report fees
Certain lender-required appraisal fees
Loan application and processing charges
Moving expenses, unless a special exception applies
Some loan-related charges have separate tax treatment when business or investment property is involved, but we're talking about your personal residence here.
What About Your Down Payment?
This question comes up more often than you might think.
Your down payment is not a tax deduction.
It's part of what you're paying to acquire your home.
And the principal portion of your mortgage payments isn't deductible either.
The potential deduction generally comes from qualifying interest, not the amount of money you're borrowing or repaying.
My Recommendation: Save Your Closing Disclosure
Even if you're taking the standard deduction and don't expect any immediate tax benefit, keep your closing documents.
You'll want them when you eventually sell.
And if you're building a home, the same concept applies. Your land purchase and construction financing may involve multiple closing statements, each with expenses that need to be evaluated.
Don't throw those documents away just because the purchase is complete.
Sometimes the tax benefit isn't realized until years later.
Coming Next: Construction Loan Interest
If you're building instead of buying, when can that interest become deductible?
We'll talk about the special IRS rules for homes under construction and why the timing of your build can matter.
Supporting IRS References
About JOLT Strategies
JOLT Strategies provides outsourced accounting, tax strategy, and advisory services to growing businesses and their owners. We believe good tax planning should happen throughout the year, not just when it's time to file a return.
This article is for general educational purposes and does not constitute individualized tax advice. Tax treatment depends on your circumstances and applicable tax law.
Related JOLT services
READY FOR THE NEXT STEP?
