Are my mortgage closing costs tax-deductible?

As a firsttime homebuyer, you may be surprised by how expensive real estate can be. In addition to purchasing a house itself, homeowners have to plan to pay closing costs, which usually cost between 3% and 6% of the total loan amount.

For context, that means if your home's purchase price is $250,000, you could pay as much as $15,000 in estimated closing costs. So it makes sense to try to save money wherever possible. And at some point, you may have wondered whether your closing costs are tax-deductible.

An underwriting fee, recording fee, appraisal fee, attorneys fee, search fees and even credit report fees are all examples of costs to be paid for upon the closing of your house. Additionally, seller concessions are closing costs paid by the seller of the home you're purchasing.

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When it comes to mortgage write-offs, homeowners can take advantage of tax deductions on their property taxes and mortgage interest. However, you may be surprised to learn how many of your closing costs fall under this umbrella.

5 mortgage closing costs that are tax-deductible

The current standard deduction is $12,400 for single individuals and $24,800 for married couples, according to the Internal Revenue Service (IRS). So any tax deductions you receive from your closing costs will only be beneficial if they add up to more than the standard deduction.

1. Loan origination fee and mortgage points

Mortgage points are any fees and charges you paid to purchase the home. Points can include things like origination charges, discount points, and maximum loan charges.

The IRS considers mortgage points to be prepaid interest, and they may be tax-deductible if you itemize your deductions. However, mortgage points must meet the following requirements to be tax-deductible:

• You used the mortgage points for your primary place of residence
• Paying mortgage points is an established business practice in the area you bought the home
• The points fall within the normal range for that area
• The total amount of points paid is listed on your settlement statement

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2. Mortgage interest

Sometimes a portion of your mortgage interest is paid during the closing, and these costs would be tax-deductible. You can continue to deduct your mortgage interest payments every year as long as you own that home.

3. Property taxes

Your yearly property taxes are tax-deductible, so if you pay any portion of these at closing, you can deduct them from your annual taxes. However, the IRS does put limits on how much you can deduct in property taxes per year. Married couples can deduct up to $10,000 per year in property taxes or $5,000 if you’re married and filing separately.

4. Mortgage insurance

If you purchased a home and either forgo paying a down payment or paid less than 20%, most lenders will require that you take out private mortgage insurance (PMI). On average, PMI costs between 0.5% and 1.5% of the total loan amount.

Whether or not PMI is tax-deductible really depends on the current tax year. For 2020, PMI is considered tax-deductible. But Congress routinely changes this, so it’s unclear whether PMI will be tax-deductible in 2021.

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You can use this mortgage calculator to determine your rates and fees and how much you can expect to pay on your monthly payments.

5. Distressed property expenses

And finally, if you recently bought a distressed property, some of your expenses for maintaining or improving the property may be tax-deductible. For instance, if you had to pay for any back taxes or repairs, these items may be tax-deductible.

The bottom line

When you take out a home loan – whether that's a USDA loan, VA loan, an FHA mortgage or another – paying for closing costs is inevitable. But, you may be able to save yourself some money come tax season. You can take advantage of tax deductions the year they are paid or over the life of the loan.

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