Are Closing Costs Tax Deductible?

Yes and No. Some closing costs are tax deductible, but most are not.

Here are the closing costs that are tax deductible:

Pre-Paid Interest – If you close in the middle of the month, you will owe interest on the remainder of that month. This is deductible as is all interest on your mortgage.

Pro-Rated Taxes – You might owe property taxes for the remainder of the current month. These are deductible as regular property taxes even though you are paying them at closing.

Points – Some points are deductible if they meet all these criteria as described in IRS Publication 530:

You can deduct the full amount of points in the year paid if you meet all the following tests:

1. Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid were not more than the points generally charged in that area.
4. You use the cash method of accounting. Most individuals use this method.
5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees and property taxes.
6. The funds you provided at, or before, closing plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money and other funds you paid at, or before, closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage.
9. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s.

All the rest of your closing costs are non-deductible. That includes costs like appraisal fees, notary fees, preparation costs for the mortgage note or deed of trust, attorney fees, title insurance, etc.

If you are refinancing, the points can still be deducted, but the deductions must be amortized or spread out over the course of the loan. Also, if the seller has to pay points the buyer gets to deduct them.