Are closing costs tax deductible? Many homebuyers and sellers know closing costs are an unavoidable part of a real estate transaction. Homesellers typically pay the most in closing costs– anywhere from six to ten percent of the home’s sale price. However, homebuyers can also expect to pay a decent amount ranging from two to five percent.
These costs can quickly eat into the homebuyer’s or seller’s budget. For this reason, many people may wonder if any of the costs can be deducted from their taxes. In this post, our team at Your Home Sold Guaranteed Realty — The Nathan Clark Team will discuss whether closing costs are deductible and how homebuyers and sellers can save money in a real estate transaction.
Are Closing Costs Tax Deductible For Buyers and Sellers?
The good news is that there are a few tax-deductible closing costs for both homebuyers and sellers. However, there aren’t many, and home sellers have more deduction options than homebuyers.
Deductible Costs For Homebuyers
Homebuyers have several costs that can be deducted from their taxes. The first one is property taxes that you pay upfront during the closing process.
Property taxes are normally tax deductible– up to a limit of $10,000. When you first take out a mortgage, you’ll typically have to pay some property taxes in advance as part of your escrow arrangement. You’ll be able to deduct this amount from your taxable income.
The second deduction is mortgage points. Points are an optional fee you can pay to your lender to lower your interest rate. One point is equivalent to one percent of the home loan amount.
You can deduct the entire amount you spend on mortgage points as long as the home is being used for your primary residence. You also need to make sure you deduct the cost of the points in the same year that you purchased them.
Other deductions include the origination fee, which is a fee your lender will charge for processing your mortgage, and mortgage interest that you prepay when you close on the home.
Non-Deductible Costs When Buying a Home
Aside from the deductions mentioned above, homebuyers will not be able to deduct all other closing costs associated with purchasing a home. Some of these may include:
- Home appraisal fees
- Home inspection fees
- Title insurance
- Credit check fees
- Abstract fees
- Legal fees
- Transfer taxes
- Homeowners association fees
- Flood monitoring fees
- Utility costs
- Notary fees
Deductible Costs For Home Sellers
Home sellers have more options for tax deductions than buyers do, though they’re handled differently. They can essentially deduct any costs associated with the selling process, including realtor commissions, legal fees, escrow fees, and home staging costs.
However, these costs aren’t deducted directly from the seller’s taxable income. Instead, they are added to the home’s cost basis, which is the home’s original value. Raising the cost basis decreases the amount of capital gains tax the home seller would otherwise have to pay on the profits of the sale.
Other costs that can be deducted include property taxes, title insurance, title fees, survey fees, and the cost of installing utilities.
Our Team Can Help You Buy or Sell a Home in New England
If you’re wondering, “are closing costs tax deductible,” the short answer is yes. However, it’s best to always check with a tax professional about your exact situation, as rules may vary depending on where you live, when you purchased the home, and your income.
Your lender and realtor may also be able to provide some insight. An experienced realtor will be familiar with all the closing costs involved in the buying and selling processes. As a result, they’ll have an idea about what you can do to lower your expenses.
They may also have a network of lenders and other preferred partners in the area who can help you buy or sell a home.
At Your Home Sold Guaranteed Realty — The Nathan Clark Team, we’ve served the real estate market in New England for 21 years. During that time, we’ve developed a reputation as one of the best realtors in the area. In fact, we sell homes 30% faster and for nearly 7.5% more money than our competitors.
On top of that, we offer several buyer’s and seller’s guarantees that make buying or selling a home as stress-free as possible.
To learn more about our guarantees or what it’s like working with us, give us a call at 401-288-3557 or fill out the form below for more information.