What part of my closing costs are tax deductible?
Closing on your home can be a lot more expensive than you might think, so it’s a good idea to see if there’s any part of your closings costs that you can deduct from your taxes. While some costs are tax deductible, others aren’t, so it pays to stay informed.
Closings Costs and Tax Deductions: What You Need to Know
Some of the common closing costs that are tax deductible include:
Prepaid Mortgage Interest: During closing, many buyers pay some of their interest in advance. Sometimes they do this to reduce their interest payments, other times it’s because it’s actually required as a condition of getting approved for the loan. If you’re pre-paying interest beyond the current tax year, that deduction will have to be applied to the specific future year that the interest would have originally been paid.
Transfer Taxes: If you’re purchasing a home for rental or investment purposes, you’ll likely have to pay transfer taxes, which are tax deductible. Plus, HOA fees for rental properties are also deductible (keep in mind, though, that the IRS does not allow HOA fees to be deducted for non-rental properties).
Real Estate Taxes: Real estate taxes, which can add up to hundreds of dollars, can also be deducted from your taxes.
Refinance Prepayment Penalties: If you’re refinancing your loan and are being charged a prepayment penalty from your original lender, in many cases, this may be tax deductible.
Non-Tax Deductible Closing Costs
Some of the closing costs that aren’t tax deductible include:
Title insurance, title search, and other similar fees
Home appraisals
Inspection costs
Real estate commissions
Ask Your Lender What You Can and Can’t Deduct
While we’ve covered most of the main closing costs above, it’s always a good idea to consult with your lender which costs may or may not be covered. Since some kinds of costs and fees can vary from lender to lender, you don’t want to miss out on a potential deduction that could save you hundreds or thousands of dollars on your taxes.