Are Closing Costs Tax-Deductible?

Understanding closing costs

Closing costs are expenses and fees that are incurred when you finalize a mortgage. Some costs include appraisal fees, property taxes, home inspections, homeowners insurance, title insurance and title service provider fees. Closing costs are typically between 2% and 5% of the total purchase price of the home. When signing legal documents to transfer home ownership, you're closing on a home.

What closing costs are tax deductible?

Some closing costs are tax deductible, including property taxes, prepaid interest and mortgage points. "In general, origination fees and points paid on a purchase loan to buy or build your primary residence are tax deductible," said Michelle White, national mortgage expert for The CE Shop. “It is always best to consult with a tax professional regarding your specific situation."

If you itemize deductions, closing costs can be deducted the same year you purchase your home, but don't expect to be able to deduct all closing costs from your taxes.

Mortgage insurance premiums paid after Dec. 31, 2021, are no longer tax deductible, per the IRS. But below, we highlight closing costs that are tax deductible.

Property taxes

Local and state property taxes are deductible on your taxes the same year you pay the tax. You can deduct property taxes up to $10,000; if you're married and filing separately, it's $5,000.

Prepaid interest

Prepaid interest is the amount of interest that accumulates from the start of your loan date and the day you close on your home. For example, if you close on a home on April 5, you'll pay interest from April 5 to April 30, known as prepaid interest. Then, starting May 1, you'll pay the first interest payment along with the regular principal. Prepaid interest is deductible on your taxes.

Points

Points are associated with a loan that helps to reduce your interest rate. Points are a way to explain specific charges as paid or considered paid by a person who attains a home mortgage. According to the IRS, points are also referred to as maximum loan charges, loan discounts, loan origination fees or discount points.

Mortgage points are tax deductible, though you can't always deduct the entire amount in the year they are paid. There are a set of nine exceptions and all nine must be met for a borrower to deduct the entire amount of points in a year.

According to the IRS, the criteria for fully deducting points in the year they’re paid are:

1. Your loan is secured by your main home — your primary residence;
2. Paying points is an established business practice in the area where the loan was made;
3. Points paid weren’t more than the points generally charged in that area;
4. You use the cash method of accounting, reporting income in the year you receive it and deducting expenses in the year you paid them;
5. Points weren’t paid in place of amounts that are normally separate on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees and property taxes;
6. Funds you provided at or before closing (including a down payment, an escrow deposit and earnest money), in addition to any points the seller paid, were at least as much as the points charged;
7. You use the loan to buy or build your primary home;
8. Points were figured as a percentage of the principal amount of the mortgage;
9. The amount is clearly shown on the settlement statement as points charged for the mortgage.

Are closing costs tax deductible on a second home?

You should be able to deduct mortgage interest paid on a second home, as long as the mortgage meets the same requirements for deductible interest as your primary home.

You may also be able to deduct state and local property taxes on your second home.

How to deduct closing costs on your tax return

When it comes time to deduct specific closing costs on your taxes, you'll need to use certain forms from the IRS. You should receive Form 1098 from your lender and reference line 8b and line 8c for deductible interests.

Use Form 1040, or Schedule A, to input on line 8a the points and home mortgage interest that are deductible. If you pay $600 or more in mortgage interest, you can expect to receive Form 1098. If you're doing your taxes for the following year, you should receive this form by the end of January.

Bottom line

Taking out a mortgage to buy a home means you'll pay closing costs. These fees and expenses average around 2% to 5% of the purchase price of the property. Some closing costs can be deducted from your taxes — but not all of them. Property taxes and points are common closing costs that are tax deductible.