If you bought a home this year or think you may buy one soon, you probably wonder ‘are closing costs tax deductible?’
While we would love to give you a definite answer – it truly does depend on your situation. Below we go through the various situations to help you determine if you can write off your closing costs on your taxes.
The Allowed Write-Offs
First, let’s look at which closing costs you may be able to write off on your taxes. Just because you paid $12,000 in closing costs doesn’t mean that you can write off $12,000 on your taxes. The IRS only allows you to write off certain closing costs, such as:
- Origination points
- Prepaid interest
- Real estate taxes
The Non-Allowed Write-Offs
So now that you know what you may be able to write off on your taxes, which costs can you not write off under any circumstances?
- Appraisal fees
- Title fees
- Inspection fees
- Attorney fees
- Credit report fees
- Insurance premiums
What’s the Catch?
As with any deduction on your taxes, there’s a catch. Starting with your 2018 income taxes, the standard deduction increased quite a bit. Individuals have a standard deduction of $12,000 and married couples have a standard deduction of $24,000.
This means if your itemized deductions don’t total more than $12,000 or $24,000, it makes more sense to take the standard deduction. You’ll lower your tax liability by taking the standard deduction.
Figuring Out What to Do
So how do you know which deduction you should take? First, total up the closing costs that you can deduct. This means:
- Look at your origination charges on your Closing Disclosure. They are shown as a percentage. If you paid 2 points, you paid 2% of your loan amount.
- Look at your Closing Disclosure to determine how much you paid in real estate taxes at the closing. This can include any amount that you put into your escrow account for payment of taxes this year.
- Look at your Closing Disclosure to determine the amount of prepaid interest you paid. This is the interest you pay at the closing. Because you pay interest in arrears and you won’t make a mortgage payment for an estimated 45 days, you’ll pay interest from the day of closing through to the end of that month.
The only other figure you need to include in this amount is any other real estate taxes you paid out of your own pocket outside of the closing. For example, if you paid a prorated amount of taxes for taxes that were due already and then you paid the county the second half of the taxes due later in the year, you can write those taxes off too.
You Must Itemize Your Deductions
The largest difference between taking the standard deduction and itemizing is the work involved. If you decide that you want to write off your closing costs, you’ll also need to itemize any other allowable deductions.
Itemizing deductions takes time and quite a bit of work. If you know that your closing costs will put you well over the standard deduction, especially when you combine it with other deductions, then it may be well worth it. If you will be ‘close,’ though, you may want to talk to your tax advisor about the difference and make a decision from there.
The answer to ‘are closing costs tax deductible’ is yes, but that it depends. Get with your tax advisor to determine if it makes sense to itemize your closing costs on your taxes. Make sure that you keep careful records of all fees that you pay as well; you will need ample proof of the payments in order to deduct them on your taxes.