Closing costs are fees and expenses incurred when purchasing a home, such as loan origination fees, points, appraisal fees, title insurance, and other associated costs. Depending on the type of loan and situation, closing costs can be quite costly, so many homebuyers are eager to know if they are tax deductible. The answer is not a simple yes or no, as the tax deductibility of closing costs depends on the type of loan, the type of home being purchased, and the taxpayer’s individual situation. For example, closing costs associated with a mortgage used to purchase a primary residence may be tax deductible while those associated with a mortgage used to purchase an investment property may not be.
What Types of Closing Costs are Tax Deductible?
Generally speaking, closing costs associated with a mortgage used to purchase a primary residence are tax deductible. This includes mortgage origination fees, points, appraisal fees, title insurance, and other associated costs. However, closing costs for a mortgage used to purchase an investment property are not tax deductible. Additionally, closing costs associated with a refinance are not tax deductible.
Are Points Tax Deductible?
Points are a type of closing cost associated with mortgages. They are a form of prepaid interest, paid to the lender to reduce the interest rate on the loan. Points can be tax deductible, depending on the type of loan and the taxpayer’s individual situation. Points associated with a mortgage used to purchase a primary residence can be tax deductible, as long as the points are considered to be “mortgage interest” rather than “prepaid interest”. In order for points to be considered “mortgage interest”, the following criteria must be met: The points must be stated separately from the other closing costs, the points must be paid in cash or by check at closing, and the points must be an amount equal to 1% of the loan amount. If these criteria are met, then the points are considered to be “mortgage interest” and are tax deductible.
Are Appraisal Fees Tax Deductible?
Appraisal fees are a type of closing cost associated with mortgages. Appraisal fees are paid to have a professional appraiser assess the value of the home being purchased. Appraisal fees are typically tax deductible, as long as they are associated with a mortgage used to purchase a primary residence.
Are Title Insurance Fees Tax Deductible?
Title insurance fees are a type of closing cost associated with mortgages. Title insurance fees are paid to ensure that the title of the property is free from any liens or other encumbrances, and that the buyer is the rightful owner of the property. Title insurance fees are typically tax deductible, as long as they are associated with a mortgage used to purchase a primary residence.
Are Other Closing Costs Tax Deductible?
In addition to points, appraisal fees, and title insurance fees, other closing costs associated with a mortgage used to purchase a primary residence may be tax deductible. This includes fees for credit reports, document preparation, and other related costs. As long as the closing costs are associated with a mortgage used to purchase a primary residence, they may be tax deductible.
Are Closing Costs Deductible in the Year of Purchase?
Closing costs associated with a mortgage used to purchase a primary residence are generally tax deductible in the year of purchase. The taxpayer should receive a Form 1098 from the lender, which shows the amount of interest paid during the year. Any closing costs paid in the same year should be included in the total amount of interest paid for the year.
Are Closing Costs Tax Deductible for Refinances?
Closing costs associated with a refinance are generally not tax deductible. Refinancing does not qualify for the mortgage interest deduction, so any closing costs associated with the refinance are not eligible for the deduction.
Conclusion
Closing costs associated with a mortgage used to purchase a primary residence are generally tax deductible, as long as they meet certain criteria. This includes points, appraisal fees, title insurance fees, and other related costs. Closing costs associated with a refinance are generally not tax deductible. In order to take advantage of the tax deduction, the closing costs must be paid in the same year as the mortgage. Taxpayers should speak with a tax professional if they have any questions regarding the tax deductibility of their closing costs.
