What Closing Costs Are Tax Deductible When Buying or Selling a Home?

Buying and selling a home comes with various costs that can make moving expensive. On top of required costs like appraisal fees and title insurance, people often have to spend extra on moving supplies, temporary housing, and staging. 

While many closing costs are not tax-deductible, some expenses can provide tax benefits. The key to getting these tax benefits is to itemize your deductions and keep clear documentation throughout the year. 

This guide will provide clear information on deductible closing costs for both buyers and sellers. Whether you bought, sold, or both last year, you can maximize the benefits on your taxes. Here’s what you need to know.

Are Closing Costs Tax Deductible?

Most closing costs are not tax deductible and are natural expenses that come with buying and selling property. However, some key closing costs can be included with your taxes to help you save money. These include your mortgage interest, loan origination fees, and property taxes.  

Many of these deductions only apply to specific situations, such as if the home is a primary residence compared to a vacation home or investment property. Additionally, they usually only apply if you decide to itemize your taxes instead of taking the standard deduction. 

This guide can cover what closing costs are tax deductible, but you can also work with a tax professional to gather the right documents and information. They can advise you on possible deductions so you get the most money back. 

Tax-Deductible Closing Costs for Homebuyers

The first half of this guide will focus on tax deductible closing costs for home buyers. If you purchased a primary residence this year, you can list multiple deductions on your taxes.

This information is also relevant if you are self-employed and use part of your home as a dedicated office or workspace. If this is the case, you might have more deductions than you expect.

Mortgage Points

Mortgage points are a form of pre-paid interest that allow you to reduce the loan rate on your home. One point usually costs 1% of the loan amount and will lower your interest rate by 0.25%. For example, if you have a $200,000 loan, then each point would cost $2,000. You might pay $8,000 to lower your interest rate by 1%. 

These discount points are beneficial to buyers who want to pay a lower interest rate in the long run. However, they are also useful for tax deductions. 

Discount points are tax deductible if you are buying a primary residence and these fees are common in your area. You can also only use this tax deduction once. Claim your points as tax deductible for the year you bought the house. Unlike other closing costs on this list, you cannot claim them every year. 

Loan origination fees are also tax deductible for buyers. You can find this information in your loan documents or the closing statements for your home.

Mortgage Interest

Buyers can also deduct mortgage interest paid as part of their closing costs. Unlike the loan origination fees, you can deduct your mortgage interest annually – as long as you have a mortgage payment. The interest is deductible for the first $750,000 of the loan and is reported on Form 1098. This form will be provided by your mortgage lender before January 30 each year. It highlights how much interest you paid the previous year so you can include it on your taxes. 

If you use an amortization calculator, you can see that a larger percentage of your monthly bill will be for mortgage interest when you first start making payments. Your mortgage interest payments will drop as you pay off your remaining principal. This means this annual tax deduction will also decrease. Once you pay off your mortgage, you can no longer use this tax deduction. 

Property Taxes

Buyers can deduct real estate taxes paid at closing. These property taxes can be deducted for primary residences, investment homes, vacation properties, and other real estate purchases. Buyers can deduct up to $10,000 paid in property taxes for their home. 

These fees are tax deductible because you already paid taxes on your property and shouldn’t be double billed for it. You can claim this deduction each year you file your taxes as long as you still own the property.

Tax-Deductible Closing Costs for Home Sellers

Home sellers can also take advantage of certain tax deductible closing costs. While they don’t have loan origination fees, they still have mortgage interest paid when the loan is closed. They also still have property taxes and other expenses to cover. 

Here are a few tax deductible closing costs that sellers need to be aware of.

Mortgage Interest on the Final Payment

Sellers can expect their mortgage lender to also send Form 1098 at the start of the new year. Unless the home was sold on December 31, you likely made at least one mortgage payment the year that you moved. Any interest payments you made on the mortgage can be tax deductible. 

Tax forms are one of the main reasons why your lenders ask for forwarding addresses when you sell your home. They need to mail these documents to your new address so you can file on time. Many mortgage lenders also have online portals where you can find these tax forms.

Property Taxes Paid at Closing

Property taxes are often negotiated during the home sale process. Some sellers may agree to pay real estate taxes for the year as part of the final deal. Look at your closing statement and identify any property taxes you paid. These are tax deductible for the year that you closed. 

If you aren’t sure where to look on your closing statement, ask your real estate agent to help you. They can help you understand different sections and what they mean. This way you won’t forget to list your real estate taxes on your tax deductions so you get the most money back. A tax professional can also help you with this process and will ask to see your closing documents.

Selling Expenses That May Be Deductible

If you are selling your home, you may need to pay capital gains tax on the deal. Homeowners who are selling their primary residences can apply for a $250,000 exemption for single files (or $500,000 for married couples filing jointly). This is why it is more common for people to pay capital gains tax on the sale of an investment property, second home, or vacation house than a primary residence. 

Capital gains tax is only applied to the profits of the sale of a home. For example, if you bought a house for $200,000 and sold it for $425,000 then the initial profits would be $225,000. This is below the $250,000 primary residence exemption threshold, so you don’t have to worry about a tax bill. However, if you sold the same house for $475,000 then your initial profits would bring you to $275,000 – qualifying you for capital gains taxes. Even then, once the $250,000 exemption is applied, you would only pay taxes on the remaining $25,000. 

There are additional tax deductions that can reduce your capital gains bill. You can also deduct selling costs that come with transferring the property. These include real estate agent commissions, legal fees, and title insurance. Using the same example as above, if you paid 5% commission on a $475,000 home sale, then your Realtor commissions would be $23,750. This deduction would nearly eliminate your capital gains tax burden. 

Evaluate the home you sold and the potential for a capital gains tax bill. See what closing costs are tax deductible and which exemptions you qualify for to reduce your overall costs. 

Closing Costs That Are Not Tax-Deductible

While loan origination fees and title insurance provide valuable tax deductions, there are several closing costs that you cannot add to your taxes. These costs are a natural part of moving and occur when you buy or sell property. Here are a few costs that are not tax deductible. 

• Homeowners insurance premiums: homeowners insurance is not tax deductible and is considered a standard expense for homeownership. 
• Home appraisal fees: this is another fee that comes with buying a house or refinancing your current property. It is not tax deductible. 
• Home inspection fees: Like appraisal costs, the price of home inspections when buying cannot be added to your deductions. 
• Title insurance: This is not tax deductible unless it is part of an investment property transaction. However, title insurance is essential for preventing real estate fraud. 
• Escrow fees: Your escrow fees are part of your closing costs and cover a variety of expenses that come with managing your loan. These are not tax deductible. 
• HOA fees at closing: homeowners association fees also cannot be added to your taxes to receive additional deductions. These fees include the remaining balance owed to your HOA along with any fees you pay ahead of time as part of the seller concessions. 

Knowing which expenses are not tax deductible can help you sort the relevant closing costs from those that don’t need to be included. This process can also help you save the right documents and paperwork you need to include with your taxes.

How to Claim Closing Cost Deductions

Once you have an idea for what kinds of closing costs are tax deductible, you can take steps to include them in your taxes. This may require you to change how you file your taxes while also keeping better documents throughout the year. However, a few healthy habits when it comes to organization can have a big impact.

Itemize Your Deductions

Standard deductions are the easiest to file and are often preferred by people who don’t have complicated taxes or several deductions to take advantage of. However, you will need to itemize your taxes if you plan to take advantage of these deductible closing costs.  

If you are filing on your own, itemization may take longer. If you are working with a tax professional, itemization may be more expensive. However, many filers feel like the savings that come with itemization are worth it. 

The first year itemizing your deductions is often the hardest, but you can get into a routine of gathering paperwork each year and grow more comfortable with the process.

Identify the Necessary Tax Forms

Expect your mortgage loan company to send Form 1098 at the start of the year and learn which tax forms are relevant for deducting your closing costs. Form 1040 is one of the most essential documents for tax deductions. This form is where you will list your deductions and go over any additional income (like gambling winnings and prize money) that you need to report.  

Some tax professionals and software systems can help you fill out these forms by asking a series of questions about your previous year. This can help you identify the fields you need to fill out versus the ones you can leave blank. 

Keep Relevant Documentation On-Hand

Filing your taxes will be easier if you know where important documents related to your home sale are. Keeping your closing disclosure accessible will make it easier to report any discount points or mortgage loan origination fees. Looking for Form 1098 and saving it when it arrives will help you record your interest deduction.

Good organization is one of the best ways to streamline the tax filing process. Even if you work with a tax expert, it will be easier to submit these documents if you already know where various forms and files are.  

Work With Experts Who Can Help

Buying or selling a home can have complex tax implications. While you can deduct multiple closing costs, you might have other bills that increase your taxes. Knowing whether you need to pay capital gains tax and what deductions are available to you can make paying your taxes easier. 

When in doubt, work with experts. Consult a CPA or tax advisor to make sure you maximize your deductions while staying compliant with IRS rules. You can also ask your Realtor for help, even if the home sale or purchase happened a few months ago.

You don’t have to be alone when filing your taxes. Buyers and sellers can get through this process with expert advice.

Maximize Tax Deductions by Tracking Closing Costs

Buyers, sellers, and homeowners have more than enough costs to cover each year. They need to pay real estate taxes, mortgage insurance, and dozens of other repair costs. When it’s time to file your taxes, get the most out of potential deductions. Look at your mortgage loan paperwork and identify points, interest, and other fees you can deduct. 

You also don’t need to be a tax expert to get the most out of your deductions. Find a certified professional in your area who can walk you through the tax process. You can also call your real estate agent to review any necessary documents and paperwork that comes with filing your taxes. 

If you are preparing to enter the real estate market, turn to FastExpert. You can find qualified agents in your area who you feel comfortable working with. Not only will they help you buy or sell your house, but they can check in during tax time to make sure you have everything you need. Working with people who are experts in closing costs and loan origination fees can make handling complex financial documents easier. 

Try FastExpert today and hire a Realtor who can be a trusted partner throughout the homeownership process.