are closing costs tax deductible

Are Closing Costs Tax Deductible in 2024? (Buyers & Sellers)

Buying or selling a property and wondering what closing costs are deductible? It’s a good question and one that can potentially save you a significant amount of money.

Unfortunately, determining what is (and what isn’t) a deductible closing cost can be really daunting, as it requires a thorough understanding of the tax code and specific circumstances. 

That’s where this comprehensive guide on are closing costs tax deductible comes in, so let’s get started.

Disclaimer: The information provided in this article is for educational purposes only and should not be construed as legal advice. We are not experts in legal matters, and readers are encouraged to seek the proper professional legal counsel for specific guidance.

So, Are Closing Costs Tax Deductible?

Most closing costs aren’t tax-deductible since the IRS views closing costs as part of the purchase price and not as a separate expense. But, there are exceptions that may apply to a buyer or seller, depending on the type of property and transaction.

As a general rule, closing costs are tax-deductible if they’re considered to be part of the cost basis or selling expenses. For example, if you’re selling a house and have to pay for a real estate agent or attorney, those fees can be claimed as selling expenses and will reduce any potential capital gains taxes.

Closing costs can vary depending on the location and type of property transaction. For example, in California, the average closing costs for a home sale is around 7.71% once realtor fees are included. This can be a significant expense, so it’s worth exploring all possible closing costs tax-deductible expenses.

What Closing Costs Are Tax Deductible 2024?

For 2024, the tax-deductible closing costs include interest payments, certain mortgage points, and real estate taxes. Additional costs like settlement fees and abstract fees, while not directly deductible, can be added to your property’s basis, potentially reducing one’s tax liability upon sale via depreciation deductions.

For example, if you’re a buyer, mortgage points (also known as “origination fees”) paid to your lender at the time of closing may be tax deductible.

If you’re a seller, the IRS allows you to deduct certain closing costs that were incurred to prepare the property for sale, such as repairs or home staging expenses.

We’ll go over the various scenarios in detail and explain which closing costs are tax deductible, so you can better understand how they apply to your specific situation.

What Closing Costs Are Tax Deductible When Buying a Home?

Let’s go over the specifics of what closing costs are tax deductible for buyers.

Remember that some of the closing costs listed below may not necessarily apply when you purchased your home. For example, deductible closing costs for a cash buyer will vary from those financing their purchase.

Mortgage Interest

According to the IRS regulations on home mortgage interest and property tax, you can deduct on the portion of the mortgage closing costs used to buy, build, or improve your primary residence and even a second home.

The total loan amount on which you can claim this tax break is capped at $750,000 for married couples when filing jointly, or $375,000 for single filers. This deduction makes a significant impact on your tax bill, particularly at the start of the mortgage term when the majority of your payments go towards interest.

Note that the mortgage interest you pay within the same year as the purchase of your home (or before) may also be tax-deductible if your closing takes place during the first few days of the year. For example, if you close on January 2nd, the interest for that day may be included in your deductible amount.

However, keep in mind that if you cash-out refinance the property, the new loan’s interest may not be fully deductible. This is because cash-out refinancing uses funds to pay off other debt, and the interest typically do not qualify as mortgage debt. 

Mortgage Points

Mortgage points are charges paid directly to the lender at the time of loan origination to reduce the interest rate of the loan.

According to the IRS rules on home mortgage points, these points are typically deductible in the year paid if the loan is used to buy or build your primary home. However, several conditions must be met for these points over the life of the loan to be deductible:

  1. The loan must be secured by your primary residence
  2. The points cannot exceed the amount typically charged in your area
  3. You must also use these points to buy or improve your property

Buyers can take the standard deduction of these points or itemize them for potentially bigger tax savings. However, It’s essential to note that not all mortgage-related fees are considered tax-deductible.

Typically, only origination fees may qualify for this deduction. Additionally, you can deduct these points in the tax year they were incurred or amortize them over the life of your loan, depending on the specific circumstances.

Real Estate Taxes

As per IRS regulations on real property taxes, home buyers can deduct up to $10,000 ($5,000 if married filing separately) of state and local property taxes on their federal income tax return.

Note that the deduction only applies if a buyer shoulders the entire property tax bill. If the seller has agreed to shoulder a portion of the property taxes, buyers can only claim a deduction based on the amount that they paid for.

Another important point to consider is that these taxes are based on the assessed value of the property and charged uniformly. They don’t include expenses for improvements that tend to increase the property value, like streets and sidewalks. 

To claim this deduction, you must itemize your deductions on Schedule A of your federal tax return. Remember, this is a yearly deduction, so you can take advantage of it each year you own your home.

Prepaid Mortgage Interest

Prepaid mortgage interest applies when you take out a home loan, and it’s paid for the time period that falls between the closing date and the end of the month. 

For example, if you bought your home in the middle of August, you’ll need to pay interest for the remaining half of August.

This prepaid mortgage interest is included in your closing costs and can be fully deducted on your tax return for that year.

Settlement Fees

Other fees included in your closing costs, such as appraisal fees, credit report fees, and attorney fees, may also be tax deductible. However, standard deductions are not as straightforward and are subject to certain conditions:

  • Appraisal fees: can only be deducted on your federal income tax return if the purpose of the appraisal is to determine the fair market value of the property.
  • Credit report fees: deductible if they’re paid to your lender for a specific purpose, such as getting approved for a loan.
  • Attorney fees: only if they were charged for services that are typically performed by an attorney (like drafting documents) and not for other services like document recording.

Before you pay closing costs, we recommend reviewing your closing disclosure or settlement statement thoroughly to identify any settlement fees that may be tax deductible. You might be surprised at how much you can save on your taxes by taking advantage of these deductions!

Recording Fees

Recording fees are charges you pay to your local government office, usually the county, for the public recording of real estate documents. These documents can include deeds, mortgages, and documents related to the mortgage.

According to IRS Publication 530, recording fees associated with a home purchase or sale might be tax deductible.

However, it’s important to note that such deductions can only be claimed by whoever paid the recording fee. Additionally, these deductions are related to the purchase of the home and not related to any other transaction.

If the seller paid these recording fees as part of the closing costs, they cannot be claimed by the buyer. Keep in mind that not all states or counties have a uniform recording fee, so it’s essential to review your settlement statement carefully for any discrepancies.

Private Mortgage Insurance

Private mortgage insurance premiums, commonly referred to as PMI, is a type of insurance that lenders require on conventional loans when the homebuyer makes a down payment that is less than 20% of the home’s purchase price.

As of 2022, PMI is no longer deductible for federal income taxes. However, if you took out a mortgage in 2021 and continue to pay PMI, you can still deduct this from your tax return.

Distressed Property Expense

When you invest in a distressed property, you might incur expenses for repairs and maintenance to make the property habitable. These expenses can be capitalized and depreciated over the useful life of the property, reducing your taxable income over time. 

Expenses such as cleaning, repainting, fixing broken windows, or other maintenance tasks can be deducted in the year they are incurred. Major improvements like a new roof, plumbing, or electrical work are not immediately deductible; instead, they should be added to the basis of your property and depreciated over time.

What Closing Costs Are Tax Deductible When Selling a Home?

While the tax benefits are generally less for sellers than for buyers, certain closing costs and home improvements could lower your tax obligations:

Mortgage Taxes

Mortgage taxes may also be deductible for sellers depending on the agreement reached with the buyer. In some circumstances, a seller pays the buyer’s closing costs, which may include mortgage taxes.

If this is the case, these taxes could be deducted from the proceeds of the sale and reduce your taxable gain. You must report any amount that you received for paying the buyer’s closing costs on your federal income tax return.

Transfer Taxes

Depending on where you live, the cost of transfer taxes could range from a few hundred to several thousand dollars.

For example, in Murrieta, California, the transfer tax is $0.55 per $1000 of the property value. So, if you purchase a house valued at $500,000, the transfer tax would be $275. You can then deduct this amount from the proceeds of your home sale to reduce the capital gains you owe come tax time.

Home Improvements

If you make any energy-efficient improvements to your home, such as installing solar panels or a new HVAC system, these costs might be eligible for tax credits.

Additionally, any repairs made before putting your home on the market can also be deducted from the sales proceeds. However, note that maintenance costs are NOT deductible. Only expenses incurred directly related to preparing your home for sale can be claimed.

Escrow Fees

Generally speaking, the IRS considers escrow fees as a non tax-deductible expense. These costs form part of the financial outlay in selling a property and are typically divided evenly between the seller and buyer.

Still, there are some instances where escrow fees may be tax-deductible for sellers, such as when they are an allowable expense under the Real Estate Settlement Procedures Act (RESPA). Certain escrow fees related to obtaining a mortgage, like appraisal and credit report fees, may also be deductible if listed separately on the settlement statement.

Title Insurance

Even though the cost of title insurance is not tax-deductible, it can be added to the basis of your property, which can reduce your capital gains tax when you sell the property. 

Real Estate Commission

In 2024, the average commission rate for realtors in the US is 5.46%. Fortunately, this cost can be deducted on your federal income tax return, reducing your taxable gain from the sale. But keep in mind that this deduction is only eligible for primary residences and not investment properties.

Of course, if you sell a house without a realtor, you won’t have to pay this commission, and it won’t be a deductible expense.

But in this case, you’ll likely have to take on additional responsibilities yourself, such as marketing the property and handling negotiations with potential buyers. 

The good news is these legal fees are generally tax-deductible expenses. Make sure that you keep thorough records of all legal fees and costs associated with selling your property as these will be necessary to claim the deduction.

Legal fees associated with selling a property may include:

  • General legal advice
  • Title searches
  • Preparing the deed and
  • Cost of a real estate lawyer

Advertising Expense

As a seller, you should know that these advertising costs are not immediately tax-deductible. However, they can be added to the basis of the property, reducing the capital gains when the property is sold.

Typical advertising expenses are:

  • Professional photographer
  • Premium listings on real estate websites
  • Flyer printing
  • Hosting open-house events

Additional reading: what fees are associated with selling a house

Can You Write Off Closing Costs on Taxes? Our Key Takeaways

Opportunities for a closing cost tax deduction can provide significant relief for homebuyers and sellers. While not all fees incurred during a real estate transaction are deductible, a considerable number of them are and can help you deduct your closing costs expenses.

For sellers, this includes:

  • Mortgage taxes
  • Transfer taxes
  • Home improvements
  • Real estate commission
  • Legal fees
  • Advertising expenses

Buyers, on the other hand, can claim deductions on:

  • Mortgage interest
  • Property taxes
  • Home improvements
  • Points paid at closing

To ensure you take full advantage of these potential tax benefits, it’s essential to keep detailed records of all your expenses related to buying or selling a property. Have everything itemized on your loan’s closing documents and gather receipts for any additional costs. 

Every dollar saved on taxes is another dollar in your pocket!

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