Can I deduct closing costs?

November, 14 2019 by Chris Rubino, EA

Closing costs can be pesky things, particularly if you are new to buying or selling real estate and didn’t expect them. After all, you agreed to a sales price, and agreed to a down payment, and now you want to know what all these other things are that you are paying for. And since you are paying for them, can you at least deduct them from your taxes? After all, aren’t tax deductions one of the joys of home ownership? Well…not so fast, maybe some of those costs will be deductible after all.

When a home is purchased there is a lot more going on than the mere purchase of property; it is not like buying a sack of potatoes at your local supermarket. What else is usually going on generally falls into three categories – first, real estate is usually bought with someone else’s money (the home loan), so you have the costs associated with opening a loan or perhaps for the seller paying one off; second, you are paying the legal costs of the transfer of title; and third, you are paying some of the costs that come with the title, such as taxes and the like. And don’t forget how many people you are helping to employ, and they all have to get paid, such as the realtors, the realty offices involved, the escrow office and officer, the finance people; and some of these fees create separate closing cost line items on the Closing Disclosure document or HUD-1 statement.

But once completed, what is the impact of these various costs on your tax return? Well, in some cases the costs are deductible, in others the cost adds to the tax cost of the home (known as your basis), and in other cases you are out-of-luck; that is, it is just a cost you had to pay without any income tax impact. Let’s look at them one at a time.

Deductible: In order to take any deduction for the purchase of your personal residence you have to itemize deductions on the Schedule A of the Form 1040. If you do, some of your home loan costs are deductible, such as any mortgage interest you pre-pay through escrow, or any points that you paid on the purchase of your primary residence that were a percentage of the loan amount. Points are sometimes called loan origination fees or loan discount fees. Also deductible are any real property taxes you paid, assuming you stay under the $10,000 limit on the deduction for property and other taxes on the Schedule A. At one time there was an allowed deduction for certain qualified mortgage insurance costs, but at the present time this deduction has gone away, although Congress has considered re-instating it. The general rule is if the cost would be deductible on your return if paid outside of the purchase process, then it would be deductible even if paid as part of your closing costs.

Add to your basis: Basis is what you paid for the home (it’s cost), plus certain items that are considered the cost of home ownership. Examples are title costs, transfer taxes, survey costs, and the like, or any of the seller’s expenses that you may have agreed to pay. The general rule here is if it is a cost that you had to pay to purchase the home, that you would have to pay even if you paid cash for the home (i.e., not a loan cost) and it is not a deductible cost, then it is a cost that adds to basis.

Non-deductible costs: Examples of non-deductible costs are items like credit report fees, loan fees that are not points (specific loan services you may have paid for), appraisal fees, pest or home inspection fees, HOA fees, and the like. The general rule here is if it is not a cost to obtain title or a cost that is deductible, then it is non-deductible.