When you buy a home, closing costs can feel like a huge amount of money. In many cases, thousands of dollars are paid at the time of signing. Many buyers wonder whether any of these costs are tax-deductible.
The short answer is that most closure costs are not tax-deductible, but certain items such as mortgage interest, discount points, and prepaid property taxes may be. Other costs are not immediately deductible, but can be added to your home’s cost base, potentially reducing your tax liability when you sell.
This Redfin Real Estate article explains which closure costs can be deducted, which closure costs, what closure costs, what closure costs can’t, and how to make the most of your home’s cost standards for future tax benefits.
Which closure fees are tax-deductible?
Closure costs are fees and expenses paid to complete a real estate transaction. They usually range from 2% to 5% of the home’s purchase price and may include loan origination fees, title insurance, record fees, prepaid taxes and more.
Most closure costs are not tax-deductible, but mortgage interest, discount points, and property taxes can usually be deducted, but only if you itemize tax return deductions. If you receive the standard deduction, the most advantageous choice for many taxpayers, these deductions generally do not apply.
1. Mortgage interest
The interest on prepaid mortgages, often collected at closing, is entirely deductible in the year that is generally paid. This includes profits arising between the deadline and the end of the month. The lender will report this amount on Form 1098.
Keep in mind that there are limits on mortgage interest that can be deducted – typically up to $750,000 on most new mortgages, or $1 million on old loans made by December 16, 2017. Interest on major residences is usually deductible, and the second home may qualify as well. Tax rules are subject to change, so we recommend checking with a tax professional to see what applies to your situation.
2. Discount points
Mortgage points, also known as discount points, are fees paid to lenders to reduce interest rates. Usually, each point costs 1% of the mortgage and can reduce the interest rate by about 0.25% per point. Points can be deducted during the year of purchase.
Points are paid on loans protected by a major residence. The amount is clearly stated as a key point in the payment statement. Points are calculated as a percentage of the loan amount.
Points paid for refinances generally need to be amortized over the life of the loan, rather than being deducted immediately.
3. Fixed Asset Tax
Many lenders require buyers to pay a portion of their property taxes upfront through escrow accounts that cover future tax and insurance payments. The IRS treats these payments as if they were made directly and can be deducted upon itemization.
Typically, state and local tax credits (salt) close at $10,000. However, for the 2025-2028 tax year, this cap will increase temporarily to $40,000 for most filers, or $20,000 for married and applying separately. Please note that this deduction can be reduced for high-income earners. Therefore, your ability to claim the full amount may vary depending on your income.
Closure costs that are not considered tax deductible
As a general rule of thumb, any fees or expenses paid for the service are not tax-deductible. This applies to many costs incurred during closures. These fees are essential to completing the transaction, but they are usually not billable on your tax return.
Common non-deductible closure costs are:
Title Insurance Premium Assessment and Inspection Fees Attorney or Escrow Fees are not directly linked to deductible items and the number of transferees
These costs won’t cut taxes immediately, but they can provide long-term tax benefits through home cost standards.
Cost-based mechanism
Your home’s cost base can start with the purchase price and increase by certain non-deductible costs paid at closing. By adding these fees to the cost base, you effectively reduce the capital gains tax you owed when selling 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 base. Later, if you sell your home for profit, a higher cost base reduces the portion of your taxable sales and potentially saves thousands of taxes.
It is important to maintain a thorough record of all closure costs. These costs cannot be deducted immediately, but properly documenting them can significantly reduce your taxable profits when selling your home.
FAQ: Details of closing costs and tax credits
Can I deduct the cost of closing my second home?
Generally, closing costs for a No. 1 or villa are not generally deductible except that interest and points on a particular mortgage may be limited.
Can I refinance my mortgage and deduct the closing costs?
Closing costs for some refinances, such as points, can be deducted during the life of the loan, but most fees (title, valuation, recordings) cannot be deducted immediately.
Can HOA fees and home inspections be deducted?
no. HOA fees, home inspections, and similar service-related closure costs are not tax-deductible, but may in some cases be added to the cost base.
What documents are required to request these deductions?
Keeping a detailed record of your home purchase is important to claim deductible closure fees. Key documents include payment statements (HUD-1 or closing disclosure), Form 1098, and escrow statements. Tax professionals can review these documents and advise which costs are deductible or can be added to your basis to maximize tax incentives and continue to comply with current tax regulations.
If I receive the standard deduction, can I deduct the closure fee?
no. You must itemize your deductions to claim property tax, points, or mortgage insurance. Many taxpayers benefit more from standard deductions.
