When you buy a home, closing costs can take a bite out of your bank account. However, you can use some of these closing costs to get some money back when you file your income tax return, but only if you itemize your deductions. Itemizing requires you to give up the standard deduction, but if you keep track of all your costs, you're likely to benefit.
Points are closing fees that represent costs paid to lower the interest rate over the remainder of your loan. Points are also known as loan origination fees, discount points, loan discount or maximum loan charges. If the loan is secured by your main home, paying points is a standard business practice in your area, the points paid are not more than generally charged, the points are not charged in lieu of other fees that should be separately stated, you or the seller pay the points, you use the loan to purchase the home, the points are figured as a percentage of your total loan amount and the amount is stated on your closing statement, you can deduct all of the points in the year you pay them. To take the deduction, report the amount on line 10 of Schedule A.
Mortgage Insurance Premiums
If you can't put down a large-enough down payment, you may have to prepay for mortgage insurance premiums. If you're using a VA mortgage or an FHA mortgage, it can be known as a funding fee or a guarantee fee. However, if the cost represents payment for later years, you have to allocate the payments over the shorter of 84 months or the remainder of the loan. For example, if you pay $4,200 in funding fees on a 30-year mortgage, you have to allocate those premiums over the first 84 months of the mortgage when figuring your deductions. This deduction goes on line 13 of Schedule A.
Real Estate Taxes
Any real estate taxes you pay at closing for the taxes on the property during the time you own it are included in your real estate tax deduction. For example, if the seller has already paid the real estate taxes for the entire year and you buy the home on July 1, halfway through the year, and you pay for half the year's real estate taxes at closing, you can deduct that amount. This deduction goes on line 6 of Schedule A.
If you close in the middle of the month, most mortgage lenders require you to pay for the remainder of the month's interest at the time of closing. This expense counts as mortgage interest you pay, which qualifies for the mortgage interest deduction. Report this deduction on line 10 of Schedule A. The limitation on the mortgage interest deduction is quite high: you can only deduct the interest on the first $1 million of mortgage debt, or first $500,000 if you're married filing separately.
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