2024 Tax Guide: Can You Deduct Closing Costs on Your Home Purchase or Sale?

If you’re in the process of buying or selling a property and pondering which closing costs you can deduct, it’s a valid concern and could mean substantial savings for you.

However, unraveling what qualifies as deductible closing costs can be quite intimidating, demanding a deep dive into the tax regulations and individual situations.

But fear not! This comprehensive guide on the tax deductibility of closing costs is here to demystify the process. Let’s dive right in.

Wondering if Closing Costs are Tax Deductible?

Typically, most closing costs aren’t tax-deductible, as the IRS considers them part of the overall purchase price rather than separate expenses. However, there are exceptions that may apply to buyers or sellers, contingent on the property type and transaction.

As a general guideline, closing costs may be tax-deductible if they’re categorized as part of the cost basis or selling expenses. For instance, if you’re selling a property and incur expenses for a real estate agent or attorney, those fees can be claimed as selling expenses, potentially reducing any capital gains taxes.

Closing costs can fluctuate based on the property’s location and the type of transaction. In California, for instance, average closing costs for a home sale hover around 7.71%, inclusive of realtor fees. Given their potential significance, it’s prudent to explore all avenues for potentially deductible closing costs.

Which Closing Costs Can You Deduct in 2024?

For the tax year 2024, deductible closing costs encompass interest payments, specific mortgage points, and real estate taxes. While settlement fees and abstract fees aren’t directly deductible, they can augment your property’s basis, potentially reducing your tax liability upon sale via depreciation deductions.

For instance, if you’re a buyer, mortgage points, also referred to as “origination fees,” paid to your lender at closing might be eligible for tax deduction.

As a seller, certain closing costs incurred to ready the property for sale, such as repairs or home staging expenses, can be deducted according to the IRS.

We’ll delve into various scenarios in detail to elucidate which closing costs qualify for tax deduction, empowering you to comprehend their implications for your unique circumstances.

Which Closing Costs Can You Deduct When Buying a Home?

Let’s delve into the specifics of which closing costs are tax-deductible for homebuyers.

Remember, the closing costs listed below may not all apply to your particular home purchase, especially if you’re a cash buyer versus financing your purchase.

Mortgage Interest

According to IRS guidelines on home mortgage interest and property tax, you can deduct the portion of mortgage closing costs used to buy, build, or improve your primary or secondary residence.

This deduction is capped at $750,000 for married couples filing jointly or $375,000 for single filers. It’s a significant tax benefit, particularly at the beginning of your mortgage term when most payments cover interest.

You can also deduct mortgage interest paid within the same tax year as your home purchase, potentially including interest from the day of closing if it falls early in the year. However, keep in mind that interest on cash-out refinancing may not be fully deductible, as it often pays off other debt not considered mortgage debt.

Mortgage Points

Mortgage points, paid to the lender to reduce your loan’s interest rate at origination, can be deductible in the year paid if certain conditions are met:

  • The loan must be secured by your primary residence.
  • The points can’t exceed typical charges in your area.
  • You must use the points to buy or improve your property.

You can deduct points in the tax year they’re incurred or amortize them over the loan’s life, depending on circumstances.

Can You Deduct Closing Costs on Your Home Purchase or Sale

Real Estate Taxes

Homebuyers can deduct up to $10,000 ($5,000 if married filing separately) of state and local property taxes on their federal return. This deduction applies only if you pay the entire tax bill, not just a portion agreed upon with the seller.

Prepaid Mortgage Interest

Interest paid between closing and month-end can be fully deducted for that tax year.

Settlement Fees

Certain fees like appraisal, credit report, and attorney fees may be deductible under specific conditions:

  • Appraisal fees must determine the property’s fair market value.
  • Credit report fees must be paid for loan approval.
  • Attorney fees must be for typical legal services, not other tasks.

Review your closing disclosure for deductible fees before paying.

Recording Fees

Charges for public recording of real estate documents might be deductible if you paid them.

Private Mortgage Insurance PMI premiums aren’t deductible for mortgages taken out after 2021, but you can deduct them for earlier mortgages.

Distressed Property Expense Expenses for making a distressed property habitable can be capitalized and depreciated over time. Maintenance costs are deductible annually, while major improvements increase the property’s basis for depreciation.

Which Closing Costs Can You Deduct When Selling a Home?

While sellers generally have fewer tax benefits compared to buyers, certain closing costs and home improvements could help lower your tax liabilities:

Mortgage Taxes

Depending on the agreement with the buyer, sellers may pay the buyer’s closing costs, including mortgage taxes. These taxes, if covered by the seller, can be deducted from the sale proceeds, reducing taxable gains.

Transfer Taxes

Transfer taxes, varying by location, can be deducted from the sale proceeds. For instance, in Murrieta, California, you can deduct the transfer tax based on the property’s value.

Home Improvements

Energy-efficient upgrades like solar panels or HVAC systems may qualify for tax credits. Pre-sale repairs are deductible, but maintenance costs are not.

Escrow Fees

Typically non-deductible, but certain instances, like under the RESPA, may allow deductions for specific escrow fees related to mortgage acquisition.

Title Insurance

While not directly deductible, adding title insurance costs to your property’s basis can lower capital gains taxes upon sale.

Real Estate Commission

The average commission rate for realtors can be deducted, but only for primary residences, not investment properties.

Legal Fees

These fees are generally deductible, covering services like title searches and deed preparation. Detailed records are crucial for claiming this deduction.

Advertising Expense

Though not immediately deductible, advertising costs can be added to the property’s basis, reducing capital gains upon sale. Examples include professional photography and online listings.

Understanding which closing costs are deductible can significantly impact your tax obligations when selling your home, so it’s essential to keep thorough records and seek professional guidance for optimal tax planning.

Can You Deduct Closing Costs on Taxes? Here’s What You Need to Know

Understanding the opportunities for a closing cost tax deduction can offer significant relief for both homebuyers and sellers. While not all expenses incurred during a real estate transaction are deductible, many are eligible, potentially reducing your closing costs.

For sellers, deductible expenses may include:

  • Mortgage taxes
  • Transfer taxes
  • Home improvements
  • Real estate commission
  • Legal fees
  • Advertising expenses

Buyers, on the other hand, can potentially claim deductions for:

  • Mortgage interest
  • Property taxes
  • Home improvements
  • Points paid at closing

To ensure you maximize these potential tax benefits, it’s crucial to maintain detailed records of all expenses related to buying or selling a property. Itemize all costs on your loan’s closing documents and retain receipts for any additional expenses incurred.

Remember, every dollar saved on taxes translates to more money in your pocket!

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Marc Afzal- Real Estate Investor

Marc Afzal is a full time Real Estate Investor and has well over 21+ years in the Real Estate Industry. Marc is a Licensed Broker, NMLS licensed Loan Officer. Marc is currently married to his wife Sheila and they live in Napa California. Marc is enthusiastic about Sports, Golf, Real Estate Investing, Family and Travel.

About Marc Afzal

Marc Afzal is a full time Real Estate Investor and has well over 21+ years in the Real Estate Industry. Marc is a Licensed Broker, NMLS licensed Loan Officer. Marc is currently married to his wife Sheila and they live in Napa California. Marc is enthusiastic about Sports, Golf, Real Estate Investing, Family and Travel.

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