The answer to whether closing costs are tax-deductible — is often the most frustrating one- “It depends.”
Basically, you’ll want to itemize if you have deductions totaling more than the standard deduction, which for 2021 is $12,550 for a single person and $25,100 for married couples filing jointly. Every taxpayer gets this deduction, homeowner or not. And most people take the deductions because their actual itemized deductions are less than the standard amount.
To see if you have enough deductions to itemize, you need to know what’s tax-deductible when buying or owning a house. Let us take a look at the list of possible deductions:
The one-time home purchase costs that are tax-deductible as closing costs are real estate taxes charged to you when you closed, mortgage interest paid when you settled, and some loan origination fees applicable to a mortgage of $750,000 or less.
But you’ll only be able to benefit from them if all your deductions total more than the standard deduction.
Costs of closing on a home that isn’t tax deductible include:
- Real estate commissions
- Home inspections
- Attorney fees
- Title fees
- Transfer taxes
- Mortgage refi fees
Mortgage interest and property taxes are annual expenses of owning a home that may or may not be deductible.
Yearly, you can write off the interest you pay on up to $750,000 of mortgage debt. Most homeowners don’t have mortgages large enough to hit the cap as per some real estate research. The $750,000 cap affects loans taken out after Dec. 16, 2017. If you have a loan older than that and you itemize, you can keep deducting your mortgage interest on debt up to $1 million.
Home Equity Loan Interest
You can deduct the interest on a home equity loan or a second mortgage. But — and this is a big but — only if you use the proceeds to substantially improve your house, and only if the loan, combined with your first mortgage, doesn’t add up to more than the magic number of $750,000. If you use a home equity loan to pay medical bills, vacation, buy a car, or for anything but home improvement, you can’t deduct the interest.
State and Local Taxes
You can deduct state and local taxes you paid, including property and income taxes (or sales taxes in states where there is no income tax), up to $10,000 ($5,000 if married filing separately). Deductible personal property taxes are those based only on the value of the personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it’s collected more than once a year or less than once a year.
Loss From a Disaster
You can write off the cost of damage to your home if it’s caused by an event in a federally declared disaster zone, like areas in Florida after Hurricane Michael or Shasta County, Calif., after a rash of wildfires.
However standard-home-variety disasters like a busted water pipe while you’re on vacation or a fire caused because you left the toaster on aren’t deductible.
This deduction is also only for some. You can deduct moving expenses if you’re an active member of the armed forces moving to a new station. And if your employer pays your moving expenses, you’ll have to pay taxes on the reimbursement. Some employers may gross up the reimbursement amount to provide cash to pay the tax, but many likely will not.
This is a deduction you don’t have to itemize. You can take it on top of the standard deduction, but only if you’re self-employed. If you are an employee and are working from home during the pandemic, you can no longer write off home office expenses. You claim the deduction on Schedule C.
Anyone paying a mortgage and a student loan payment will be happy to hear that the interest on your education loan is tax-deductible on top of the standard deduction (no need to itemize). And you can deduct as much as $2,500 in interest per year, depending on your modified adjusted gross income.
Ways to Increase Your Eligible Deductions
There are some other costs that can be itemized not related to being a homeowner that could bump you up over the standard deduction. Charitable contributions and some medical expenses can be itemized, although medical expenses must exceed 7.5% of your adjusted gross income.
Tax-Savvy Home-Buying Ideas
If you’re a prospective homeowner with an eye to making the most efficient use of your tax benefits, here are a few ways to buy smart:
- Especially in expensive areas, buy a less expensive home so you don’t hit the cap on mortgage debt and local and property taxes.
- If you’re buying a higher-priced home, make a bigger down payment so your original mortgage doesn’t exceed the $750,000 cap.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice. Please consult a tax professional for such advice.