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Are Closing Costs Tax Deductible?

If you’re a homeowner, you may have paid closing costs when you purchased or refinanced your home. Closing costs are fees associated with the home buying process, such as appraisal fees, title fees, and loan origination fees. But are these costs tax deductible? In this article, we’ll explore the topic of closing costs and their tax deductibility.

Tax Deductible?

Understanding Closing Costs

Closing costs are expenses you pay when you buy or refinance a home. These expenses can include fees for the lender, the title company, and other third-party service providers. Depending on the location and value of the property, closing costs can range from 2% to 5% of the home’s purchase price.

Types of Closing Costs

There are many different types of closing costs, including:

  • Appraisal fee
  • Title search and insurance fees
  • Loan origination fee
  • Home inspection fee
  • Escrow deposit
  • Attorney fees
  • Recording fees
  • Transfer taxes

Which Closing Costs Are Tax Deductible?

Here are some closing costs that may be tax deductible:

Mortgage interest: If you took out a mortgage to purchase or refinance your home, you may be able to deduct the interest you paid on the loan. This includes any “points” you paid to lower your interest rate.
Property taxes: You may be able to deduct any property taxes you paid at closing, as well as any property taxes you pay throughout the year.
Mortgage insurance premiums: If you pay for private mortgage insurance (PMI), you may be able to deduct those premiums on your taxes.
Points: As mentioned above, you may be able to deduct the points you paid at closing to lower your interest rate.

How to Deduct Closing Costs on Your Taxes

IIf you want to deduct closing costs on your taxes, you’ll need to itemize your deductions on Schedule A of your tax return. This means you’ll need to forgo the standard deduction and instead list out all of your eligible deductions, including your closing costs. Keep in mind that you can only deduct the amount of closing costs that exceed 2% of your adjusted gross income (AGI).

What if You Don't Itemize Deductions?

If you don’t itemize your deductions, you won’t be able to deduct your closing costs. However, you may still be able to take advantage of other tax benefits related to homeownership, such as the mortgage interest deduction or the property tax deduction.

Closing Thoughts

Closing costs can be a significant expense when buying or refinancing a home. While they are generally not tax deductible, there are some exceptions. If you’re not sure whether your closing costs are tax deductible, it’s a good idea to consult with a tax professional or accountant.

FAQs

No, not all closing costs are tax deductible. Only certain expenses, such as mortgage interest and property taxes, maybe deductible.
No, an escrow deposit is not tax deductible.
If you purchased a rental property, some of your closing costs may be tax deductible as business expenses. Consult with a tax professional for guidance on this matter.

Yes, you may be able to deduct the points you paid at closing to refinance your home. However, the deduction must be spread out over the life of the loan.

First-time homebuyers may be eligible for a tax credit called the First-Time Homebuyer Credit. However, this credit is not related to closing costs and has different eligibility requirements.

Whether or not you can deduct closing costs on your state taxes depends on the tax laws in your state. Check with your state’s tax agency or a tax professional for guidance.
No, the cost of a home inspection is not tax deductible.

If the seller gave you a credit to cover some of your closing costs, you may not be able to deduct those costs on your taxes. Consult with a tax professional for guidance.

If you refinanced your home multiple times in a year, you may be able to deduct the points you paid on each refinance. However, you’ll need to spread the deduction out over the life of each loan.

Closing costs related to a rental property are generally deductible as business expenses. However, the rules surrounding this can be complex, so it’s best to consult with a tax professional.

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Haoliday & more Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.