Home buyers are responsible for paying various closing expenses when they obtain a mortgage loan. Lenders and other third parties, such as title insurance providers, can generate revenue by collecting these fees.
The amount that a buyer will pay in closing fees typically ranges from three to six percent of the total loan amount. However, this amount still depends on the lender and the kind of loan.
But are closing costs tax-deductible? Home buyers would love to be able to write these expenses off on their taxes. Below, you’ll find out whether or not you can deduct these expenses on your taxes or not.
Are Closing Costs Tax-Deductible?
Whether your closing costs are tax-deductible or not depends on various factors. It is important to know that closing costs consist of different parts and fees, and whether they are tax-deductible or not depends on the type of fee.
In general, you can deduct any expenses classified as taxes or interest. However, the Internal Revenue Service (IRS) considers certain expenditures as “interest,” although the average person does not.
There are some fees associated with the closing that are not tax-deductible. Given all of the different components of the calculation, calculating homeowner tax deductions can be a highly challenging and time-consuming endeavor.
Check the IRS’s tax deduction breakdown in Form 1040 and on its website to determine whether or not the closing costs on your particular home purchase qualify for a tax deduction. Or, hire an accountant to do your taxes and let them figure it out for you.
It’s possible that you can deduct more of your closing costs than you believe you can. Here are some of the tax-deductible closing costs in a mortgage loan:
Property taxes are tax-deductible. You must typically pay property taxes in advance when you get a mortgage because lenders usually create an escrow account for borrowers.
State and local property taxes are deductible the year they are paid. You can only deduct property taxes payable at a similar rate on all local real estate for the public good.
You can deduct up to $10,000 ($5,000 if filed separately with your spouse) each year in property taxes, sales taxes, and state and local income taxes.
If you close on your mortgage after the first month, you’ll pay interest for a partial month.
In deducting the mortgage interest, the loan must be secured by your primary or second home and used to build, buy, or improve it. You can only deduct mortgage interest on the first $750,000 of debt ($375,000 if married, filing separately).
Points reduce loan interest over time. They also help with taxes. The IRS permits you to deduct the amount you pay for points in the year they’re paid. Your mortgage must be used to buy or build your principal home to qualify.
Loan Origination Fees
Loan origination fees can be tax-deductible if you buy a property within a year of filing taxes. For specific conditions, the IRS will let you deduct these fees.
If the loan is for your primary residence if you used it to acquire it, and if you didn’t use it to pay additional fees for appraising the home, an attorney, or property taxes.
What Can’t I Deduct?
Here are non-tax deductible closing fees according to Rocket Mortgage:
- Abstract fees
- Legal fees (this includes fees for the title search as well as preparation of the sales contract and deed)
- Recording fees
- Owner’s title insurance
- Credit check fees
In most cases, you will be able to deduct your closing costs from your taxes in the same year that you closed on your new house if you itemize your deductions. Si, for example, if you close on your property in 2022, you will be able to deduct these expenses from your taxes for that year.
To sum it up, only a certain amount of closing fees are tax-deductible.