Buying a new home is exciting, but it also comes with a long list of expenses – one of the biggest being closing costs. If you’re wondering whether you can deduct these costs on your tax return, the answer is: it depends. Let’s break it down.
What are closing costs?
Closing costs are fees and expenses you pay when finalizing the purchase of a home. These typically include:
- Loan origination fees
- Discount points
- Appraisal fees
- Title insurance
- Attorney fees
- Property taxes
- Prepaid interest
- Homeowner’s insurance
While most closing costs are not directly tax-deductible, there are two key deductions you may be able to claim.
What closing costs can you deduct?
- Mortage interest
- If you paid prepaid mortgage interest (sometimes called “points”) as part of your closing costs, you may be able to deduct in the year you bought your home.
- To qualify, the loan must be for your primary residence, and the points paid must be common in your area.
- Property taxes
- Any real estate taxes you paid at closing can be deducted as part of your property tax deduction.
- However, this is subject to the $10,000 cap on state and local (SALT) deductions ($5,000 if married filing separately).
What closing costs are NOT deductible?
Unfortunately, most closing costs cannot be written off, including:
- Title insurance
- Appraisal and inspection fees
- Attorney fees
- Homeowners insurance
- HOA fees
- Transfer taxes
Are closing costs ever deductible in the future?
While you may not be able to deduct most closing costs right away, some may reduce your capital gains tax when you sell the home. Expenses like title insurance, recording fees, and legal costs can be added to your home’s cost basis, reducing the taxable profit when you sell.
Bottom line
Most closing costs aren’t deductible in the year you buy your home, but you may be able to write off mortgage interest and property taxes. Keep good records because some costs can help lower your tax burden when you sell.
If you’re unsure what applies to your situation, consulting with a tax professional can help you maximize your deductions.
Need help filing your tax return? How To File Taxes LLC is here to guide you!
