Which Settlement Fees Are Deductible on a Federal Tax Return?

Buying a home usually involves paying settlement costs. Loan origination fees, pre-paid interest, pro-rated taxes, recording fees, appraisal fees and attorney fees are some of the line items you may see listed in your settlement statement. Of all settlement costs, only loan origination fees expressed as points, interest and taxes are deductible on your federal return.

If you obtained a mortgage to purchase the real estate, you probably got hit with a loan origination fee. If the loan origination fees are expressed as "points," each of which equal one percent of the loan amount, the fees are tax deductible. You can deduct the balance of both the loan origination fee and any discount points you purchased. Since the seller doesn't get a tax deduction for points paid, you may deduct points they paid as well.

In order for a loan origination fee to be deductible, it must meet several Internal Revenue Service requirements. To be deductible, the loan must be used to either buy or build a residential home. You can't deduct loan fees if the loan is used simply to renovate or add onto the home rather. The points must be the same or less than what's generally charged in your area. In addition, loan origination fees are a one-time tax deduction. You can only deduct them in the year that you buy your home.

Of other settlement costs, pre-paid mortgage interest and pro-rated taxes also qualify for a tax deduction. You'll probably pay a few weeks of pre-paid interest if you close on your home in the middle of the month. Depending on when in the year you purchase the home and when the owner last paid property taxes, you may have to pay the seller back through a pro-rated tax payment.

All eligible settlement costs will be listed on the Form 1098 for the year you bought your home. You can continue to deduct mortgage interest and property taxes as you continue to live in the home. Your lender will send you a summary of these payments every year through an annual Form 1098.

You can deduct eligible settlement costs on Schedule A of Form 1040. List any pro-rated property taxes in box 6 of "Taxes You Paid. Loan origination points and prepaid interest in box 10 of "Interest You Paid."

To deduct these expenses, you must choose to itemize your deductions rather than claim the standard deduction. To maximize your deductions, keep track of medical expenses, charitable gifts, and any unreimbursed expenses from your job. These deductions are also only available if you itemize and will help lower your total tax liability.