Are closing costs tax deductible?

Homeowner tax deductions aren’t always easy to calculate, but the IRS does break down what types of tax deductions you can take when you file Form 1040. The only way to deduct closing costs, such as property tax, is by using itemized deductions.

You cannot take a standard deduction and also deduct your closing costs, so you have to decide which one offers the most tax advantages for your situation.

Deductible closing costs

If you decide to itemize, you’ll need to know what closing costs you can actually deduct. The IRS identifies them as:

■ Home mortgage interest paid at settlement that is found on the mortgage interest statement provided by the lender.

■ Certain real estate taxes paid at closing.

■ Real estate taxes — listed on your real estate tax bill — the lender paid from escrow to the taxing authority.

Sales taxes paid at closing

■ Points — also known as loan origination fees, maximum loan charges, loan discounts or discount points — which are a one-time closing cost that provides you a discounted rate on your mortgage and can be deducted only over the life of the mortgage.

■ Mortgage insurance premiums, except for mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.

About deducting points

Some situations enable you to deduct the full amount of points in the year if you pass several tests set forth by the IRS. If you meet the following criteria, you have the option of deducting the full amount of points in the year you take out the mortgage or deducting them over the life of the loan, beginning with the year you close your loan:

■ The loan is for your main residence.

■ Paying points is typical in the area where you get your loan.

■ You didn’t pay more than the points typically charged in your area.

■ You use the cash method of accounting.

■ Points were not paid in lieu of paying other fees, such as appraisal fees, inspection fees, title order fees, attorney fees and property tax fees.

■ The money you paid at or before closing, plus any points the seller paid, was at least the equivalent of the points charged.

■ You’re using your loan to buy or build your main residence.

■ The points were calculated as a percentage of the mortgage’s principal amount.

■ The points charged are clearly shown on the Uniform Settlement Statement, Form HUD-1.

Non-deductible closing costs

There are several settlement costs and closing costs you can’t deduct or add to the basis of your home. The following closing costs are not tax-deductible:

■ Fire insurance premiums.

■ Charges for using utilities or services if you occupied the home before closing.

■ Rent paid if you moved into the home before closing.

■ Charges associated with getting or refinancing a mortgage loan, such as credit-report ordering costs, loan assumption fees and fees for a lender-ordered appraisal.

Although you’re permitted to deduct some types of real estate taxes, you can’t deduct the following types:

■ Itemized charges for services, even if the charge is paid to the taxing authority.

■ Taxes for local benefits that increase the value of your property.

■ Transfer taxes or stamp taxes.

■ Homeowners association assessment costs.

How to deduct home closing costs

If you’re eligible to deduct certain types of expenses related to home settlement fees, you can do so on Form 1040 on lines six through 13 when you file your tax return. Here’s the breakdown of where to report different closing costs on the form:

■ Real estate taxes: Line 6.

■ Home mortgage interest and points reported on Form 1098: Line 10.

■ Home mortgage interest not reported on Form 1098: Line 1.

■ Points not reported on Form 1098: Line 12.

■ Qualified mortgage insurance premiums: Line 1.

■ State and local general sales tax reduction: Line 7.

Know about deductible closing costs

Some of your closing costs are tax-deductible, so it pays to know what expenses you can deduct as itemized homeowner tax deductions come tax time.

Keep in mind that if your total itemized deductions for the year are less than the standard deduction, it doesn’t make financial sense to deduct closing costs.

Consider working with an accountant or tax professional to make sure you’re reporting all of your real estate taxes accurately and deducting only expenses that have the IRS seal of approval.