Are closing costs tax-deductible? Here's what you can deduct

Buying a home comes with closing costs that can reach $15,000 or more—but are closing costs tax deductible? The answer could save you thousands during tax season, though only specific expenses qualify for tax breaks.

Mortgage interest, property taxes, and discount points are among the closing costs you can deduct on your tax return when certain conditions are met. These deductions can meaningfully reduce your taxable income, yet many homebuyers miss these valuable tax benefits simply because they don't know which expenses qualify.

Several closing costs offer immediate tax advantages, while others provide benefits down the road. Understanding what is included in closing costs helps you identify potential deductions when filing your taxes. We'll also explore how buying a house affects your taxes beyond the closing process, showing you exactly which expenses deliver tax savings and which ones don't make the cut.

What are closing costs?

Closing costs are the fees and expenses you pay when finalizing a mortgage loan. You'll pay these costs at closing alongside your down payment when signing your final loan documents.

Closing costs typically range between 2% and 5% of the loan amount for a home purchase. Refinance loans run higher—about 3% to 6% of the loan amount. For a $300,000 home purchase, expect to pay anywhere from $6,000 to $15,000 in closing costs.

These costs cover several essential services:

— Origination and underwriting fees charged by the lender
— Professional home inspection and appraisal costs
— Title search and title insurance fees
— Mortgage or discount points to lower your interest rate
— Prepaid property taxes and insurance

Buyers typically handle most closing expenses, though how to save on rising closing costs offers strategies for reducing these fees. Some sellers may agree to cover certain costs as part of the sales agreement.

Certain closing costs affect your taxes. Most closing expenses aren't tax-deductible, but a few notable exceptions exist. For example, mortgage points may increase your closing costs but could provide tax advantages.

To estimate your potential closing costs based on current mortgage rates, use a mortgage calculator.

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What are tax deductions?

Tax deductions reduce your taxable income dollar-for-dollar, lowering your overall tax bill. The IRS permits specific expenses to be subtracted from your annual income, creating meaningful savings opportunities for homeowners.

You face a key decision each tax year: take the standard deduction or itemize individual deductions. For the 2024 tax year, the standard deduction amounts are:

— $14,600 for single filers and married individuals filing separately
— $29,200 for married couples filing jointly

Itemizing makes financial sense only when your combined deductions exceed these standard amounts. This choice becomes particularly important for homeowners since how buying a house affects taxes often hinges on whether itemizing delivers better results.

Two homeowner tax benefits stand out as especially valuable. The mortgage interest deduction allows you to deduct interest on loans up to $750,000 (for homes purchased after December 16, 2017) or $1 million (for earlier purchases). Property taxes qualify for deductions up to $10,000 annually, though this cap affects many homeowners in high-tax areas.

These deductions frequently determine whether homebuyers should itemize or stick with the standard deduction. Recognizing these tax advantages helps you evaluate which closing costs might provide tax benefits that extend well beyond your home purchase.

Are mortgage closing costs tax-deductible?

Three main closing costs deliver immediate tax benefits when you buy a home. Mortgage interest paid at closing qualifies for full deduction if your loan stays within IRS limits—$750,000 for homes purchased after December 16, 2017, or $1 million for earlier purchases.

Mortgage points (including loan origination fees) can also be deducted when they meet specific IRS conditions. These points must be for your primary residence purchase, reasonably priced for your area, and clearly documented on your closing disclosure. You can deduct points either fully in the year paid or spread across your loan term.

Property taxes prepaid at closing round out the deductible expenses, subject to the $10,000 SALT tax limit. 

Most other closing costs don't qualify for tax deductions:

— Home inspection and appraisal fees
— Title insurance and search fees
— Recording fees and attorney costs

These non-deductible expenses still provide value by adding to your home's cost basis, potentially reducing capital gains taxes when you sell. 

When are closing costs tax-deductible?

Timing determines when you can claim tax benefits from closing costs. The IRS allows homeowners to deduct eligible expenses at different intervals, depending on the specific cost.

During the year the sale closed

Certain closing costs qualify for immediate tax deductions in the year you purchased your home. Mortgage points (including origination fees) can be fully deducted if they meet these conditions:

— The mortgage must be for buying or building your primary residence
— Points must be reasonably priced for your area
— You must have proof that you paid the points
— The amount appears on your closing disclosure

Points paid on a home improvement cash-out refinance may also be deductible in the year paid if you used all funds for home renovations. Property taxes paid at closing are immediately deductible, subject to the $10,000 annual cap.

Across the mortgage term

You can spread the deduction throughout your loan term if you don't qualify to deduct points in the year paid—or if itemizing doesn't make sense that year. With a 30-year mortgage and $3,000 in points, you'd deduct $100 annually.

Points paid on home refinancing must typically be deducted over the loan's life rather than all at once. Strategically timing when you claim these deductions could affect your taxes significantly.

Which closing costs are not tax-deductible?

Most expenses you pay at closing don't qualify for immediate tax deductions. Understanding which closing costs lack tax benefits helps you plan your finances and set realistic expectations.

The following closing costs cannot be deducted on your tax return:

— Lender's title insurance
— Homeowners insurance premiums
— Homeowners association (HOA) fees
— Utility costs (gas, water, electric)
— Home appraisal and inspection fees
— Notary and attorney fees
— Credit check and recording fees
— Document preparation fees
— Mortgage insurance premiums (including FHA, VA, and USDA fees)

These non-deductible expenses aren't entirely without tax benefits. They can reduce capital gains taxes when you sell your home by adding to your cost basis—the total amount you've invested in your property.

Here's how it works: if you're married and sell your home for a $600,000 profit, you'd typically pay capital gains taxes on amounts exceeding $500,000. Those seemingly useless closing costs could help reduce that taxable gain. Understanding your closing disclosure helps identify which costs can offset future capital gains.

Closing cost tax deduction FAQs

Have questions about specific tax benefits from your real estate transaction? Here are the most common questions about closing cost tax deductions.

How much of my property taxes can I deduct on my return?

The Tax Cuts and Jobs Act of 2017 capped the state and local tax (SALT) deduction at $10,000 annually ($5,000 if married filing separately). This limitation applies to your combined state income taxes and property taxes. If you paid a portion of the seller's property taxes at closing, you can count this amount toward your $10,000 limit. Review your closing disclosure to identify eligible property tax payments.

What home-buying expenses are tax-deductible?

Beyond mortgage interest and property taxes, few closing costs qualify for immediate tax deductions. Mortgage points (including origination fees) may be deductible if they meet IRS criteria. Buying mortgage points increases closing costs but provides potential tax benefits. Since many closing costs aren't deductible, explore how to save on rising closing costs. Use a mortgage calculator to estimate these expenses based on current mortgage rates.

How much of my mortgage interest is tax-deductible?

Your purchase date determines your mortgage interest deduction limit. For homes bought after December 16, 2017, you can deduct interest on loans up to $750,000 (or $375,000 if married filing separately). For earlier purchases, the limit is $1 million ($500,000 if filing separately). Understanding what is included in closing costs and how buying a house affects taxes helps you maximize these deductions.

Conclusion

Closing cost tax deductions can reduce your tax bill, though only specific expenses qualify for immediate benefits. Mortgage interest, property taxes, and mortgage points deliver the most value when you itemize deductions above the standard deduction threshold.

Timing affects when you can claim these deductions. Some expenses like property taxes and qualifying mortgage points can be deducted in the year you buy, while refinance points typically spread across your loan term. Whether itemizing makes sense depends on your total deductions compared to the standard deduction amounts.

Understanding your closing disclosure helps identify which expenses qualify for tax benefits. Non-deductible closing costs still add to your home's cost basis, potentially reducing capital gains taxes when you sell.

Tax rules change regularly, so consult a tax professional to maximize available deductions. Understanding these deductions helps you reduce your tax burden while building equity in your home.

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