Mortgage Closing Costs and Tax Deductions: What You Need to Know

A mortgage loan entails a number of fees; however, are these closing charges deductible from your federal income taxes? The answer is usually "no." The only closing costs that are deductible in the year you purchase a property are any pre-paid real estate taxes and the points you pay to lower your interest rate.

Tax-Deductible Closing Costs

Property Taxes

Deductible: Property taxes are always deductible. If you pay some upfront, these can be deducted.
Escrow Account: Lenders often create escrow accounts for borrowers to pay property taxes and homeowners insurance, allowing you to deduct any property taxes paid in advance.

Mortgage Points

Definition: Points are fees paid to lower the interest rate, costing 1% of the loan amount.
Deduction: Points are deductible in the year paid if used to buy or build a primary residence and other IRS conditions are met.
Spread Out Deduction: Alternatively, you can spread out the deduction over the life of the mortgage.

Non-Deductible Closing Costs

Most closing costs are not deductible, including:

Abstract fees
Legal fees
Recording fees
Owner’s title insurance
Credit check fees

However, these costs can be added to your home's cost basis, potentially reducing capital gains tax when you sell.

Homeowner Tax Deductions

Mortgage Interest: Deductible on up to $1 million in mortgage debt for homes bought before December 16, 2017, and up to $750,000 for homes bought after.
Property Taxes: Deductible up to $10,000 under the Tax Cuts and Jobs Act.

Refinancing and Capital Gains

Refinancing to a lower interest rate allows similar deductions as primary mortgages.
Closing costs from a cash-out refinance used for capital improvements can adjust your home's cost basis and reduce capital gains tax when sold.

FAQs

Private Mortgage Insurance (PMI): Deductibility varies by tax year.
Property Tax Deduction: Capped at $10,000.
Mortgage Interest Deduction: Limited to $750,000 in debt for homes bought after December 16, 2017.