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closing costs

When you’re filing your taxes, there’s a whole lot to consider. From figuring out who counts as a dependent to organizing your income streams, you may find the process a bit overwhelming. And if you’re a new homeowner tackling mortgage payments, there’s another key question you’ll want to know the answer to this tax season as you try to lower your tax liability: Are closing costs deductible on your recent home purchase? A financial advisor can help you optimize your tax strategy for your property and family needs. Below, we give you the rundown.

Simple Question: Are Closing Costs Tax-Deductible?

Simple answer: it depends. Homeowner tax deductions can be very difficult to calculate, given all the varying factors that go into the equation. So to find out whether the closing costs on your particular home purchase make the cut, check out what the IRS says in its tax deduction breakdown in Form 1040 and on its website.

As with all possible tax deductions, beyond just home-related ones, it is the responsibility of the taxpayer to report each of the taxes and fees related to the purchase as itemized deductions. Also with all possible tax deductions, your first priority is most likely to save money and earn tax advantages. For this purpose, do the groundwork: research whether taking a standard deduction versus deducting your closing costs would save you the most. The standard deduction for tax year 2021 is $12,550 for single filers an d $25,100 for married couples filing jointly. It will increase in tax year 2022 to $12,950 for single filers and $25,900 for married couples filing jointly.

Which Particular Closing Costs Can You Deduct?

You can’t completely deduct all the costs of closing on your house. Only a few eligible ones make the cut. The IRS denotes the following as deductible costs:

  • Sales tax issued at closing
  • Real estate taxes charged to you when you closed
  • Mortgage interest paid when cost was settled
  • Real estate taxes that were paid for by the mortgage lender
  • The interest you paid at the time of the home purchase
  • Loan origination fees (a.k.a. “points”). These would be written as a percentage of the borrowed money.

Variation exists among these costs, and each house purchase carries different rules. Be sure to double check whether your needs fit with these, and reach out to your lender or advisor if you’re not sure.

Loan Origination Fees

closing costs tax-deductible

When thinking about whether closing costs are tax deductible, it’s important to understand the role of loan origination fees or points. Lenders charge loan origination fees in return for their underwriting your mortgage. The service includes identity, credit card and paperwork verification and preparation, and it is crucial for closing on the deal. This fee will come out to about 1% of your mortgage.

Loan origination fees are important to consider, because sometimes they can be tax-deductible if you purchased your home within a year of filing the taxes. The IRS will let you deduct these fees but only for certain reasons. Those include if the loan is for your primary place of residence, if you used the loan to buy this primary residence and if you didn’t pay the loan in place of additional fees for appraising the home or paying for an attorney or property taxes.

Which Closing Costs Are Completely Non-Deductible?

Although there are some recognized loopholes—ways to get a tax-deductible status on various costs of closing on your house—there are still many costs that are strictly non-deductible. They are as follows:

  • Pre-move-in utilities charges
  • Fire and flood insurance or certificates
  • Pre-closing rent (if you moved in early)
  • Mortgage refinancing
  • Title fees
  • Real estate commissions
  • Costs of appraisal
  • Home inspections
  • Costs of reporting credit
  • Transfer taxes
  • Attorney fees

These non-deductible expenses are added to the cost of the property. You should note them on your Form 1040. For a complete list, consult the IRS tax policy list, which you can find on the agency’s website. Another important point: The higher your income is, the less you can deduct from your income taxes.

How to Fill Out the 1040 in Accordance with Closing Cost Deductions

It can be challenging to calculate your own homeowner tax deductions, but the IRS does a good job of breaking it down once you arrive at the 1040 Form. The only way to deduct your closing costs is to provide a list of itemized deductions. This requires a bit of forethought. You can’t take the standard deduction while also deducting your original closing costs. Therefore, it’s up to you to pick which one offers the best tax advantages for your finances.

Bottom Line

closing costs tax-deductible

There is no clear-cut answer on whether closing costs are tax-deductible, because no two closing cost situations are the same. Depending on factors such as personal wealth, tax bracket, home cost, permanent residence location and related fees, you can be anywhere from 10% to 90% exempt. If you’re unsure of where specifically you fall on the spectrum, talk to a trained financial advisor to help you make the important decisions while retaining as many benefits as possible.

Tips for Managing Your Taxes

  • If you need help with your taxes, a financial advisor can be a huge help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you don’t know whether you’re better off with the standard deduction versus itemized, you might want to read up on it and do some math. You could save a significant amount of money by educating yourself before the tax return deadline.
  • SmartAsset has a number of free online tax resources designed to help you get your finances in order during tax season. Check out our Income Tax Calculator and get started today.

Photo credit: ©iStock.com/monkeybusinessimages, ©iStock.com/PeopleImages, ©iStock.com/PeopleImages

Jane Thier Jane Thier writes on a variety of personal finance topics for SmartAsset. Her expertise includes banking and mortgage. Jane is currently studying at Washington University in St. Louis and serves as editor-in-chief of Armour Magazine. Jane aims to receive her Master's Degree in Journalism.
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