- Which Loan Origination Fees Are Tax Deductible?
- What Can You Write Off When Buying a Home?
- Can I Claim the Fees We Paid for Refinancing Our Mortgage?
- Which Mortgage Closing Costs Are IRS Tax-Deductible?
- The Seller's Closing Costs & Tax Write-Offs
- Can I Deduct Full Year's Property Tax if I Bought a Home in August?
When you purchase property or refinance a mortgage, not much of what you pay in closing costs is tax deductible. You can't claim many fees on your tax return to reduce the amount of income on which you must pay taxes. There are exceptions, however, depending on whether you plan to live in the property you're buying.
Original Mortgage Fees
If you purchase a home you plan to live in, only the mortgage origination fees are deductible. Also called "points," these fees are interest you pay to your lender in advance, and mortgage interest is tax deductible. One point is usually equal to 1 percent of the mortgage you're taking out. The points you pay must be comparable to those associated with other home sales in your area. You can usually deduct them in full in the tax year during which you purchase your home. Your lender will typically send you an IRS Form 1098 itemizing the points or origination fees you paid at closing.
Fees Associated With Refinancing
Your origination fees are also deductible if you refinance your home, but there's a caveat: You can't claim them -- or at least all of them -- immediately in the year you refinance. You must amortize these points over your loan term. For example, if your points amount to $3,000 and you've taken a 30-year loan, you can deduct only $100 a year for 30 years. An exception exists if you use any of the refinanced proceeds for home improvements. You can deduct that portion immediately, and spread out the rest over the life of the loan. For example, if half of the money went to home improvements, you could deduct $1,500 -- half of $3,000 -- in the first year, and the remaining $1,500 over the term of the loan.
Fees Associated with Rental Properties
You're limited to claiming origination fees and real estate taxes when you purchase rental property, but this changes if you’re refinancing the mortgage against your rental property. In this case, the IRS allows you to deduct a great many more fees associated with closing, including professional fees such as those paid to an attorney or appraiser, recording fees, abstract fees, title search fees and underwriting fees. You must amortize these deductions over the term of your loan unless you use the refinance proceeds to upgrade your property.
Non-Deductible Fees and Exceptions
If you buy a home and the seller pays the points, you might still be able to claim them. However, it could cost you in capital gains taxes later, when and if you sell your property. You must subtract these points from your home's cost basis, because the seller-paid points represent a "lower price" that you paid for the home. When you sell, you may then have to pay capital gains tax on the difference between your cost basis and the sales price, over certain dollar limits set by the IRS. In other words, you may get a tax savings when you buy the home by deducting seller-paid points, but you may owe additional taxes when you sell. One other thing to remember: some lenders charge you for "points" that are not actually interest but rather fees associated with processing your mortgage. These are not deductible.
- Rachel R. Logue: Deductibility of Points and Other Closing Costs (PDF)
- TurboTax: What Can I Deduct in a Mortgage Refinance?
- TurboTax: What Can Be Deducted When Refinancing Rental Property
- IRS: Some Refinancing Costs May Be Deductible
- Bankrate.com: Computing Your Home's Basis
- IRS: Rental Expenses Versus Passive Activity Losses (PALs)
- Buying new apartment image by Fantasista from Fotolia.com