If you’ve recently purchased a home, some of your closing costs are tax deductible on your federal income tax return. It’s essential to know which of the many expenses incurred during closing are deductible and which are not. Check your mortgage closing cost statement for the amounts you paid.
Deductible Closing Costs
As per IRS publication 530, homebuyers may deduct certain closing costs when they file federal tax returns. These include the points, or loan origination fees, you paid, as well as property taxes and mortgage interest. The IRS considers points as prepaid interest, thereby permitting deductibility. You can deduct all the points you paid in the year you paid them, rather than over the life of the loan, if the mortgage is for your primary residence and you didn’t pay more in points than the usual amount in your area. Points are worth 1 percent of the entire mortgage loan, so if you have $350,000 mortgage, each point is worth $3,500. Typically, homebuyers pay two to three points at closing, not higher amounts which limit deductibility.
To deduct closing costs, you must itemize on your Form 1040 return, reporting deductions on Schedule A. You should file Form 1098 with your return to report mortgage interest and points. Your real estate tax deduction is reported on line 6 of Form 1040, and any mortgage interest not reported on Form 1098 on line 1. If you did report home mortgage interest and points on Form 1098, list them on line 10 of your Form 1040. You will also report qualified mortgage insurance premiums on line 1. State and local sales taxes, including the property tax deduction, is reported on line 7.
Non-Deductible Closing Costs
Unfortunately, many of the costs associated with purchasing a new dwelling are not tax deductible. You can’t deduct legal fees, title insurance, appraisals, home inspection fees, transfer taxes, real estate commissions or homeowner's association fees. Mortgage insurance is only deductible if you meet the income levels, which begin phasing out for those with an adjusted gross income of $100,000 and is not deductible at all for those with an adjusted gross income of $109,000 or more.
Property Tax Deduction Limits 2018
Under the Tax Cuts and Jobs Acts, signed into law on Dec. 22, 2017, the limits on state and local tax deductions, including the property tax deduction, is $10,000. If your new mortgage is more than $750,000 and you took out the mortgage after Dec. 14, 2017, you can only deduct interest up to the $750,000 limit.
The law nearly doubles the standard deduction to $12,000 for single filers and $24,000 for those married and filing jointly. That means fewer people will itemize deductions. If your itemized deductions are less than the standard deduction, you cannot claim them on your federal income tax form.
Real Estate Tax Deductions 2017
If you purchased your new home in 2017, you may deduct the entire amount of your property taxes. You may deduct interest on mortgages up to $1 million.
Items you will need
- IRS Form 1040
- IRS Publication 530
- Loan settement statement
- Make sure to use the appropriate IRS Form 1040, which differs from its simplified counterparts, Forms 1040A and 1040EZ. Also referred to as the "long form," the 1040 gives you more opportunities than the shorter forms to reduce your tax bill, according to Bankrate.
- The real estate taxes you can deduct, as instructed in Step 4, must have been paid out to the tax authority in the tax year. Real estate taxes paid and the time period it covers are on line 211 of the HUD-1.
- Although Publication 530 for 2011 states that mortgage insurance is tax deductible, keep in mind that tax laws changed for 2012. Mortgage insurance was deductible from 2007 through 2011 only. (see Ref. 6)
- The Seattle Times: Are closing costs on a home purchase tax-deductible?
- IRS: Publication 530 (2017), Tax Information for Homeowners
- Shamrock Financial Corporation: FAQ: Are Closing Costs Tax Deductible?
- Investopedia: Form 1098
- IRS: Reporting mortgage insurance premiums (MIP) treated as qualified residence interest through December 31, 2017
- Forbes: How the New Tax Law Will Impact Your Housing Costs
- Comstock/Comstock/Getty Images