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.