Real estate closing costs can be a significant expense when buying or selling a property. These are additional expenditures incurred in a real estate transaction, above and beyond the property’s price. Depending on the purchase price, this can be more than you expected them to be, so it’s natural to wonder if these costs are tax deductible.
The answer: it depends. Some closing costs, such as origination fees and points, are tax-deductible. Others, like title insurance and appraisal fees, may be deductible depending on your personal circumstances. Here’s a closer look at some of the most common closing costs and whether they’re tax-deductible.
Origination Fees
Origination fees are charged by lenders to cover the cost of processing a loan. These fees are typically a percentage of the loan amount and can vary depending on the type of loan you’re getting. For example, origination fees on a 30-year fixed-rate mortgage are typically lower than on an adjustable-rate mortgage.
Points
Points are a type of prepaid interest that you may be required to pay when you get a mortgage. One point equals 1% of the loan amount. So, on a $100,000 loan, one point would cost you $1,000. You can deduct points paid at closing if they were used to buy or build your primary residence. Points that were paid to refinance a home are only tax-deductible if the new loan is used to buy or improve your home.
Title Insurance
Title insurance protects you from losses if there are any problems with the title to your home. For example, if someone sues you claiming they have a rightful ownership interest in your property, title insurance would cover the cost of defending against the lawsuit. Title insurance is typically paid at closing, and the premium is generally tax-deductible.
Appraisal Fees
An appraisal is an opinion of value for a particular property. Appraisals are typically required by lenders to get a loan. The appraised value is used to determine how much money the lender is willing to lend you. Appraisal fees are generally tax-deductible.
Closing Costs
Closing costs are the fees charged by lenders, real estate agents, and others in connection with the purchase of a home. These costs can vary depending on the type of loan you get and the state in which you live. In general, closing costs are not tax-deductible.
Real Estate Taxes
Property taxes are taxes levied by state and local governments on real estate. The amount of tax you pay depends on the value of your property and the tax rate in your area. Property taxes are generally tax-deductible.
Mortgage interest
This is another type of expense that is often tax-deductible. Mortgage interest is the interest you pay on a loan used to buy or improve your home. The interest you pay is usually tax-deductible, up to a certain amount.
As you can see, there are several expenses related to buying a home that may be tax-deductible. The deductibility of certain expenses depends on the type of loan you have and how you use the loan. Be sure to talk to your tax advisor to determine which expenses are deductible in your situation.
