Are Closing Costs Tax-Deductible?

When thinking of the upfront costs of a mortgage loan, most people think of the down payment, but closing costs for the lender and third parties are a significant line item as well. But will you at least get some relief at tax time? Can you deduct these closing costs on your federal income taxes?

In most cases, the answer is “no.” The only mortgage closing costs you can claim on your tax return for the tax year in which you buy a home are any points you pay to reduce your interest rate and the real estate taxes you might pay upfront.

The U.S. tax code provides homeowners with two big tax breaks: They can write off the interest they pay on their mortgage loans each year and the property taxes they pay to local municipalities. That’s the good news. The bad news? Buyers can’t deduct most of the fees their lenders charge when closing their mortgage loans.

What Closing Costs Are Tax-Deductible?

Unfortunately, not many closing costs are tax-deductible. Two exceptions are any points you buy to reduce your loan interest rate and any property taxes you pay in advance.

Property Taxes

Property taxes are always deductible. When you take out a mortgage loan, though, you’ll usually have to pay some property taxes upfront before they’re due. That’s because lenders typically create an escrow account for borrowers.

In an escrow arrangement, you’ll pay extra money with your monthly mortgage payment to cover the costs of your yearly property taxes and homeowners insurance. When your insurance and tax bills are due, your lender will dip into these funds and pay them on your behalf. Once tax time rolls around, you can deduct any property taxes you paid in advance.

Mortgage Points

Mortgage points are also tax deductible. Home buyers purchase these points to lower the interest rate on their mortgages, with each point costing 1% of their total loan amount. For instance, one point on a mortgage loan of $200,000 would cost $2,000. Each point typically drops a borrower's interest rate by 0.25%. One point, then, would lower a mortgage interest rate of 5% to 4.75% for the life of a mortgage loan.

Points can pay off in lower interest costs throughout the life of a loan. They can also help at tax time. The IRS allows you to deduct the full amount of your points in the year you pay for them. To claim this deduction, you must use your mortgage to build or buy your primary residence.

What Are Tax Deductions?

Tax deductions are items that you can claim on your federal tax return to reduce your taxable income. These deductions lower the amount of taxes you’ll pay in a given year. Taxpayers can either itemize their taxes and calculate their individual deductions, or they can claim a standard deduction and not itemize.

The 2017 Tax Cuts and Jobs Act increased the standard deductions that taxpayers can claim. Single taxpayers and married individuals filing separately can claim a standard deduction of $14,600 for the 2024 tax year. Those married and filing jointly can claim a standard deduction of $29,200. You’d only itemize your taxes if you could generate individual deductions that top those standard deduction numbers.

Homeowner Tax Deductions

Two of the more valuable deductions are related to homeownership. The mortgage interest deduction allows you to deduct the interest you pay on your mortgage each year. You can deduct a total of $1 million in interest if the home was bought before December 16, 2017, or $750,000 in interest if you bought your home after December 16, 2017. You can also deduct the property taxes you pay each year, up to $10,000.

Which Closing Costs Are Not Tax-Deductible?

Typically, the only closing costs that are tax-deductible are payments toward mortgage interest, buying points or property taxes. Other closing costs are not. These include:

• Abstract fees
• Legal fees (including fees for the title search and preparation of the sales contract and deed)
• Recording fees
• Owner’s title insurance
• Credit check fees

There is one tax benefit to these costs, though. You can add these closing fees to the cost basis of your home when you sell it. This lowers the amount of profit that you make, but it can help reduce any capital gains tax you might have to pay on your home.

When you sell a home, you won't have to pay capital gains taxes on the first $250,000 of the profit on your sale if you are single or $500,000 if you’re married. For example, if you’re married and sell your home for a $300,000 profit, you won’t have to pay any capital gains taxes on it.

However, if you’re married and sell your home for $600,000, you’d have to pay capital gains taxes on the $100,000 profit from your home sale. This is where your loan closing costs can help. You can offset the taxes on your profit by adding your closing costs and the costs of any home improvements you’ve made to your cost basis.

When Are Closing Costs Tax-Deductible?

You do have some flexibility in when you can claim those closing costs that are tax-deductible.

In The Year Of Closing

If you itemize your taxes, you can usually deduct your closing costs in the year you closed on your home. If you close on your home in 2024, you can deduct these costs on your 2024 taxes.

If you purchased mortgage points, though, things can get more complicated. You can deduct the cost of mortgage points in the tax year you purchased them if you meet the following rules laid out by the IRS:

• The mortgage loan must be used to buy or build the borrower’s primary residence.
• Paying points must be a long-standing business practice in the area where the loan is closed. The amount you paid for points must be average for the area.
• Either the buyers or sellers must pay for the points, and those payments must be documented.
• You’re not allowed to borrow the funds used to pay for points.
• The amount you paid must be clearly shown and itemized on your loan’s Closing Disclosure or settlement statement.

Over The Lifetime Of The Mortgage

You can choose to spread out the deduction for mortgage points over the life of the mortgage. There might be years when it makes more financial sense to claim the standard deduction than it does to itemize. You can hold off and only claim the points deduction in the years you do itemize.

When you refinance to a mortgage loan with a lower interest rate, you’re replacing your primary mortgage with a new one. Because of this, a refinance is considered the same as a primary mortgage for tax purposes. This means that the same closing costs – those used to prepay property taxes and those used to buy down your interest rate – are the only ones that can be deducted on your federal income taxes. Using your refinance for tax purposes and to lower your interest rate can be a great way to maximize your savings.

Closing a cash-out refinance offers a potential capital gains tax reduction. This closing occurs when you refinance for more than you owe on your existing mortgage and take the difference as a lump-sum cash payment. In this case, you might be able to use the proceeds to adjust the cost basis of your home and reduce your capital gains tax when you eventually sell. You can only do this, though, if you use the money from your cash-out refinance to make capital improvements to your home. You can speak with a tax advisor for further insight on this.

FAQs About Closing Cost Tax Deductions

Here are some additional questions you may be considering when it comes to closing costs on your home and tax deductions.

Are private mortgage insurance or mortgage insurance premiums tax-deductible?

Depending on the loan you take out, you might have to pay for private mortgage insurance (PMI) or mortgage insurance premiums (MIP). Whether these forms of mortgage insurance are deductible depends largely on the tax year. Congress routinely changes the status of mortgage insurance. For instance, in tax years 2018, 2019, 2020 and 2021, this form of insurance is tax-deductible. For the 2024 tax year, you can no longer deduct mortgage insurance premiums from your taxes.

Can I deduct closing costs on my taxes?

There are some closing costs that are eligible to be deducted on your taxes. The IRS allows you to deduct mortgage points you bought and property taxes that you’ve paid.

How much property tax can I deduct on my taxes?

Before the 2017 Tax Cuts and Jobs Act went into effect, all state and local taxes were 100% deductible. This included property taxes. The Tax Cuts and Jobs Act now limits the state and local taxes property tax deduction to a maximum of $10,000, a limit that has been in place since 2019.

How much mortgage interest can I deduct?

If you purchased your home before December 15, 2017, when the act went into effect, you can deduct the interest payments you make on up to $1 million in mortgage debt. If you bought your home after that date, you can deduct the mortgage interest you pay on up to $750,000 in mortgage debt.

The Bottom Line: Some Closing Costs Are Tax-Deductible

Even if you can’t deduct all your closing costs, the U.S. tax code still encourages people to buy homes through mortgage interest and property tax deductions. As a homeowner, it’s crucial to understand your new tax responsibilities that come along with having a mortgage and owning a home.

Understanding which closing costs are tax-deductible can be helpful when navigating the financial aspects of the home buying process. Start your mortgage application today with Rocket Mortgage^Ⓡ.