Unfortunately, the vast majority of expenses required for a home purchase cannot be deducted from your taxes. However, there are some exceptions. Namely, certain types of closing costs may qualify.
Below, we’ll take a look at which closing fees and expenses are tax-deductible and which are not so that you can plan ahead as you finalize the purchase of your home and file your taxes for the year.
What Home Buying Expenses Are Tax Deductible?
What are closing costs?
When a new homeowner closes on their home loan, the closing costs are the expenses and fees they must pay. These expenses are in addition to the overall selling price of the home.
Generally speaking, closing costs will be about three to five or six percent of the total loan you’re taking out. They basically make up any transaction-related fees incurred in order to secure and process your loan.
Which closing costs are tax-deductible?
When it comes time to file your taxes, for the majority of people, taking the standard deduction is the way to go. In nearly every situation, it’s going to save you more than itemization would. However, in a year when you buy a home, this may not be the case.
That’s because when you purchase a home, certain closing costs can be deducted, and if you choose itemization, this may put you over the threshold to ultimately save you more money than the standard deduction would have.
Keep in mind not all closing costs are tax-deductible, however. Closing costs that can be deducted include:
Points
Points, or discount points, are considered prepaid interest by the IRS. These may reduce the interest rate on your loan.
Prepaid Interest
If you do not close your home loan at the very beginning of the month on the first, you’ll need to pay a partial month’s interest. As long as certain additional stipulations are met, this amount may be tax-deductible as well.
Property Taxes
Whenever you pay property taxes, you can deduct the amount you pay for the year they are paid. Just keep in mind there are caps on the amount of property tax you can deduct.
Insurance Premiums for Mortgage
As you close your loan, you may either choose to pay all of your mortgage insurance at once, by the month, or all at once as part of your financing agreement. According to the IRS, the entire sum can be deducted from your taxes, but again, there are limitations. If you make over a certain amount, for example, you can no longer deduct your mortgage insurance premiums.
What closing costs are NOT tax-deductible?
The above list comprises the only tax-deductible fees and expenses when closing on a house. Everything else cannot be deducted. This includes:
- Attorney fees
- Notary fees
- Fees for home inspections and appraisals
- Inspections for pests
- Escrow fees
- Title insurance
- Credit check and credit report fee
- Flood monitoring and/or determination fees
- Homeowners association (HA) fees
- Home warranty fee
- Stamp taxes
- Transfer taxes
- Rent
The one redeeming factor related to these fees and taxes is that you can reduce any capital gains tax you’d have to pay by factoring in the above closing fees for your home’s cost basis were you to sell it.
Want to learn more about what home buying expenses are tax-deductible and how to reduce your taxes for the year you purchase a house? Contact us today!
