Which Mortgage Closing Costs Are IRS Tax Deductible?

Your lender sends Form 1098, which details most of your deductible closing costs.
Image Credit: Ryan Fox/iStock/Getty Images

According to Zillow.com, closing costs for home buyers are typically 2 to 5 percent of the purchase price of the home. Some of these costs are tax-deductible. Loan origination fees and points purchased are deductible, regardless of whether they're paid by the buyer or the seller. Mortgage interest expense and real estate taxes are also deductible.

Loan Origination Fees and Points

Depending on where you live and what home you buy, your closing costs could include attorney fees, survey fees, appraisal fees, inspection fees, loan origination fees and discount points. Of all these closing costs, the only deductible ones are loan origination fees and points. Points are a percentage of your loan value; each point is equal to 1 percent. To be deductible, loan origination fees must be stated in terms of points. If you buy any discount points to lower your interest rate, those are also deductible.

Closing Costs Paid By Seller

Sometimes homebuyers will negotiate to have the seller pay closing costs. Even though the costs are paid by the seller, the buyer can still deduct any loan origination fees and points paid. That's because the seller isn't able to claim a tax deduction for closing costs. As long as the points paid are clearly documented on the settlement statement, the buyer can use that statement to substantiate the deduction.

Accrued Interest and Prepaid Taxes

If you purchase your home mid-month, you may have to pay the accrued monthly interest on your mortgage. This, along with any other mortgage interest expense you incur for the home, is deductible at the end of the year. You may also have to reimburse the seller for the prorated value of property tax that he already paid. This and any subsequent property tax payments you make during the year are also deductible.

Reporting the Deduction

Your lender will send you an annual 1098 that details the amount of deductible mortgage interest expense, loan origination fees and points purchased. Record this amount on line 10 of Schedule A on your tax return. If the seller paid for the points and they're not included in your Form 1098, include those fees on line 11. Record the amount of property taxes you paid on line 6. You won't get an annual form with this information, so keep your pay stubs or check with your county tax assessor to verify how much you paid.