Unlocking Tax Savings When Buying a Home
Buying a home is an exciting adventure, but the costs involved can add up quickly. Between mortgage origination fees, property taxes, and interest payments, understanding what closing costs are tax deductible when buying or selling a home can help buyers maximize financial benefits while settling into their new space. Identifying these deductions early and keeping track of important documents can lead to valuable tax savings at the end of the year.
Mortgage Points: A Smart Deduction for Homebuyers
One of the most overlooked deductions buyers can take advantage of is mortgage points. When financing a home, buyers can pay upfront to reduce their loan’s interest rate—a move that can lead to significant long-term savings. These points (also called discount points or prepaid interest) are generally tax-deductible if they meet the IRS guidelines.
To qualify, the home must be the buyer’s primary residence, and the points must be standard practice in their area. If eligible, buyers can deduct the paid points in the year of purchase, lowering their taxable income. In some cases, if the points don’t meet all IRS conditions, they may need to be deducted over the loan’s life. The mortgage loan closing statement will specify if and how points were paid, making this a key document to retain for tax purposes.
Mortgage Interest: Ongoing Tax Benefits
Unlike one-time deductions like mortgage points, mortgage interest provides a deduction that buyers can claim each year they hold the loan. The IRS allows homeowners to deduct interest paid on home loans up to 0,000 for single filers or married couples filing jointly.
To take advantage of this deduction, buyers should look for Form 1098 from their mortgage lender. This document details the total interest paid throughout the year, providing a clear and official record for tax filing. Given that most mortgage payments in the early years are primarily interest, this deduction often saves homeowners thousands of dollars annually, making homeownership a strategically sound financial investment.
Property Taxes: A Deductible Closing Cost for Buyers
Real estate property taxes are another closing cost that buyers can claim on their taxes, providing them with significant financial relief. Homeowners are allowed to deduct property taxes up to ,000 annually, including any taxes paid at the time of purchase.
To ensure eligibility for this deduction, buyers should carefully review their closing disclosures. If property taxes were included in the closing costs or paid in advance as part of escrow, they may be deductible for the tax year of purchase. It’s important to distinguish these from transfer taxes or recording fees, which are generally not deductible.
Taking Advantage of Tax Deductions as a Homebuyer
Understanding what closing costs are tax deductible when buying or selling a home is essential for maximizing tax savings. With mortgage points, mortgage interest, and property taxes offering potential tax relief, itemizing deductions can be a smart decision for many buyers. Consulting with a tax professional or financial advisor can help homeowners confidently leverage these savings while ensuring compliance with IRS regulations.
How Home Sellers Can Lower Their Tax Bill
Selling a home comes with its own set of costs, but understanding what closing costs are tax deductible when buying or selling a home can help offset some of those expenses. While home sellers don’t have to worry about mortgage origination fees or points like buyers, they do have deductions available that can reduce their tax burden. Knowing which costs qualify—and keeping detailed records—can make tax time much easier.
Mortgage Interest on the Final Payment
Just because you’re selling your home doesn’t mean your mortgage disappears right away. If you paid mortgage interest in the year of the sale, that interest may be tax deductible. Sellers typically make at least one mortgage payment before the sale is finalized, which means there is at least some mortgage interest paid that can be deducted.
Your lender should send a Form 1098 after the year ends, outlining how much mortgage interest was paid before the loan was settled. Even if you paid off the mortgage early, the interest on your final payment may still qualify. Sellers should retain these documents and report them appropriately to ensure they maximize their deductions.
Property Taxes Paid at Closing
Property taxes don’t just affect buyers. Most sellers pay some real estate taxes at closing, which could be deducted from their taxable income. If you sold your home partway through the year, you likely paid property taxes for the months you owned the home. These amounts, detailed on the closing statement, may be eligible for deduction.
The IRS allows property tax deductions up to ,000 per year for state and local taxes combined. If you owned your home for part of the year before selling, the property taxes you paid before transferring ownership could still qualify. Going through your closing disclosure with a tax expert can ensure you claim all applicable deductions.
Selling Costs That May Be Deductible
Many sellers worry about capital gains tax after selling their homes, but certain deductions can help reduce this burden. Selling costs directly related to the home sale may qualify as deductions when calculating capital gains tax. These expenses include:
- Real estate agent commissions: Sellers typically pay the commission for both their agent and the buyer’s agent, which significantly reduces taxable profit.
- Legal and escrow fees: Transactions often involve legal work, title transfers, and escrow services—all of which may be deductible.
- Staging and advertising costs: If you spent money to market or improve the saleability of your home, those expenses could be deducted from your profits.
These selling expenses are deducted from the total sale price when determining taxable gains. For example, if you sold your home for 0,000 but paid ,000 in commissions, legal fees, and staging, your taxable gain is reduced to 0,000—helping lower your potential capital gains tax.
Capital Gains Tax Exemptions
If you’re selling your primary residence, you might not have to pay capital gains tax at all. The IRS allows individuals to exclude up to 0,000 of profit (0,000 for married couples filing jointly) from taxable income, as long as they meet the ownership and residency requirements.
To qualify for this exemption, you must have:
- Lived in the home as your primary residence for at least two of the last five years.
- Owned the home for at least two years.
- Not claimed the capital gains exclusion on another home in the past two years.
If your profit exceeds the exemption, deductible selling costs can help lower your taxable amount. Keep track of all related expenses and consult a tax professional to ensure you claim the maximum allowable exemptions and deductions.
Why Documentation Matters
The key to claiming tax deductions when selling your home is proper documentation. Keep copies of your closing disclosure, Form 1098, receipts for advertising or staging costs, and any legal or real estate fees paid. These documents provide proof of your expenses and deductions when preparing your taxes.
Working with a real estate professional and a tax expert can ensure you take full advantage of deductions while staying compliant with IRS regulations. Selling a home doesn’t have to mean paying unnecessary taxes—smart planning and careful record-keeping can help you keep more of your hard-earned profits.
The Closing Costs You Can’t Deduct
While understanding what closing costs are tax deductible when buying or selling a home is crucial to maximizing tax savings, it’s just as important to know which expenses don’t qualify for deductions. Many fees associated with a home purchase or sale are simply part of the transaction process and don’t offer any tax benefits. Being aware of these non-deductible costs ensures you don’t claim improper deductions that could trigger an audit or unexpected adjustments.
Homeowner’s Insurance: A Standard Cost of Ownership
One of the most common mistaken deductions is homeowners insurance premiums. While it’s an essential purchase to protect your investment, the IRS does not allow deductions for homeowners insurance as part of your homeownership expenses. Whether you pay your premium annually or have it included in your mortgage escrow, it won’t reduce your taxable income. However, if you own an investment property and use the home for rental income, there are some cases where the insurance premium may be deductible as a business expense.
Appraisal and Home Inspection Fees: Non-Deductible Costs
When buying a home, lenders often require an appraisal to determine the property’s market value. Likewise, a home inspection helps ensure there aren’t major structural or mechanical issues before finalizing your purchase. Unfortunately, these valuable services come at a cost—but not one you can deduct from your taxes. These fees are considered part of your transaction expenses and don’t provide any tax benefits, even if they are required by your lender.
Title Insurance: Essential, But Not a Deduction
Title insurance provides peace of mind by protecting buyers and lenders from ownership disputes, but it doesn’t offer any tax benefits for most homeowners. This cost is built into the closing process and ensures that the property has a clean title without legal conflicts. While title insurance is not tax-deductible for a primary residence, investors may have an opportunity to deduct it as part of business-related real estate transactions.
HOA Fees at Closing
If you purchase a home in a community with a homeowners association (HOA), you’ll likely need to pay upfront dues at closing. These fees often include maintenance costs or special assessments for shared property or amenities, but the IRS does not allow them as tax deductions. Regular HOA fees are considered a standard operating cost for homeowners and cannot be claimed even if they are required upfront as part of the closing deal.
Escrow Fees: Part of the Transaction Process
Escrow fees cover the administrative costs of handling a real estate transaction. These fees include holding funds, managing required documentation, and ensuring all closing costs are properly allocated before the final sale. While escrow fees are necessary for a smooth closing, they do not qualify as a tax deduction. Buyers and sellers should plan for these expenses as part of general closing costs.
Moving Costs: No Longer a Deductible Expense
There was a time when moving expenses were tax-deductible under certain conditions, especially for those relocating for work. However, with changes to tax laws in recent years, moving expenses are no longer eligible for a deduction unless you are on active duty in the military and being transferred for service-related duties. This means the costs of hiring movers, renting a truck, or purchasing packing supplies won’t help reduce your tax bill.
Why Knowing Non-Deductible Costs Matters
Filing taxes can be overwhelming, especially when dealing with real estate transactions. Understanding what closing costs are tax deductible when buying or selling a home versus those that are not ensures you remain compliant with IRS regulations and avoid claiming deductions that could lead to penalties. While buyers and sellers have opportunities to recoup certain costs through tax breaks, many common closing fees must simply be factored into the overall cost of buying or selling a home.
To simplify tax time, consider working with an accountant or tax professional who specializes in real estate transactions. Keeping detailed records of deductible and non-deductible closing costs will save time and ensure you’re maximizing every financial advantage available.