When you buy a home, closing costs can feel like a significant expense, often with thousands of dollars due at the time of signing. Many buyers naturally wonder if any of these costs are tax-deductible.
The short answer is that most closing costs are not tax-deductible, though certain items, like mortgage interest, discount points, and prepaid property taxes, may be. Other costs, while not immediately deductible, can be added to your home’s cost basis, potentially reducing your tax liability when you sell.
This Redfin real estate article explains which closing costs you can deduct, which you cannot, and how to make the most of your home’s cost basis for future tax benefits so you can plan accordingly.
Which closing costs are tax-deductible?
Closing costs are the fees and expenses you pay to finalize a real estate transaction. They usually range between 2% and 5% of the home’s purchase price and may include loan origination fees, title insurance, recording fees, prepaid taxes, and more.
While most closing costs are not tax-deductible, mortgage interest, discount points, and property taxes can usually be deducted, but only if you itemize your deductions on your tax return. If you take the standard deduction, which is the most advantageous choice for many taxpayers, these deductions generally do not apply.
1. Mortgage interest
Prepaid mortgage interest, often collected at closing, is generally fully deductible in the year it is paid. This includes interest that accrues between the closing date and the end of the month. Your lender will report this amount on Form 1098, which should be retained for your tax records.
Keep in mind that there are limits to how much mortgage interest you can deduct – typically on loans up to $750,000 for most new mortgages, or $1 million for older loans taken out before December 16, 2017. Interest on your primary residence is usually deductible, and sometimes a second home may qualify as well. Since tax rules can change, it’s a good idea to check with your tax professional to confirm what applies to your situation.
2. Discount points
Mortgage points, also called discount points, are fees paid to a lender to lower your interest rate. Each point usually costs 1% of your mortgage amount and can reduce the interest rate by roughly 0.25% per point. Points may be deductible in the year of purchase, as long as:
- The points are paid on a loan secured by your primary residence.
- The amount is clearly stated as points on your settlement statement.
- The points are calculated as a percentage of the loan amount.
Points paid on refinancing generally must be amortized over the life of the loan rather than deducted immediately.
3. Property taxes
Many lenders require buyers to pay some portion of property taxes upfront through an escrow account, which covers future tax and insurance payments. The IRS treats these payments as if you made them directly, allowing you to deduct them when you itemize.
Typically, state and local tax deductions (SALT) are capped at $10,000. However, for the 2025-2028 tax years, this cap is temporarily increased to $40,000 for most filers, or $20,000 if married and filing separately. Be aware that this deduction may be reduced for high-income earners, so your ability to claim the full amount could vary depending on your income.
Closing costs that are not considered tax-deductible
As a general rule of thumb, fees or expenses you pay for services are not tax-deductible. This applies to many of the costs incurred during closing. While these fees are essential to completing the transaction, they typically cannot be claimed on your tax return.
Common non-deductible closing costs include:
- Title insurance premiums
- Appraisal and inspection fees
- Attorney or escrow fees not directly tied to deductible items
- Recording and registration fees
- Transfer taxes
- Credit report fees
- Loan origination or processing fees (unless specifically deductible, like certain points)
Even though these expenses cannot reduce your taxes immediately, they can provide long-term tax benefits through your home’s cost basis.
How cost basis works
The cost basis of your home starts with the purchase price and can be increased by certain non-deductible expenses paid at closing. By adding these fees to your cost basis, you effectively reduce the capital gains tax owed when you sell your home.
For example:
- If you pay $3,000 for title insurance and $500 for recording fees, you can add $3,500 to your home’s cost basis.
- Later, if you sell your home for a gain, the higher cost basis reduces the portion of the sale that is taxable, potentially saving thousands in taxes.
Keeping thorough records of all closing costs is crucial. While these expenses aren’t deductible immediately, properly documenting them can significantly reduce your taxable gain when you sell your home.
FAQs: More on closing costs and tax deductions
Can I deduct closing costs on a second home?
Closing costs on a second or vacation home generally cannot be deducted, except for certain mortgage interest and points, which may have limited rules.
Can I deduct closing costs if I refinance my mortgage?
Some closing costs on a refinance, like points, can be deducted over the life of the loan, but most fees (title, appraisal, recording) are not immediately deductible.
Are HOA fees or home inspections deductible?
No. HOA fees, home inspections, and similar service-related closing costs are not tax-deductible, though they may be added to your cost basis in some cases.
What documentation do I need to claim these deductions?
To claim deductible closing costs, it’s important to keep detailed records of your home purchase. Key documents include your settlement statement (HUD-1 or Closing Disclosure), Form 1098, and escrow statements. Your tax professional can review these documents and advise which costs are deductible or can be added to your basis, helping you maximize tax benefits and remain compliant with current tax rules.
Can I deduct closing costs if I take the standard deduction?
No. You must itemize your deductions to claim property taxes, points, or mortgage insurance. Many taxpayers benefit more from the standard deduction.
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