Deduct Closing Costs on Taxes

Closing costs are comprised of various fees for services associated with the purchase of a new home such as real estate taxes, homeowners insurance, title searches and title insurance fees, real estate appraisals, private mortgage insurance, and recording costs. Those who itemize expenses may deduct some of these closing costs on their federal income tax returns. In order to deduct closing costs on your taxes, follow these steps.

Steps

  1. Obtain an Internal Revenue Service (“IRS”) Schedule A. In order to deduct closing costs on your income taxes you must itemize your deductions on IRS Schedule A (“Schedule A”). You may obtain a Schedule A from the IRS website here: http://www.irs.gov/pub/irs-pdf/f1040sa.pdf. Tax forms, including Schedule A, may also be found at your local library and/or post office during tax season.
  2. Determine the amount of real estate taxes you paid. Your tax bill includes all real estate taxes paid at closing and throughout the year. The total amount should be reported on line 6 of Schedule A. When reporting the amount of taxes you paid:
    • Check your tax bill carefully to ensure that no amounts, which are non-deductible, have been included. Non-deductible items include charges for services such as trash collection, lawn mowing, or flat fees for water usage and improvements that tend to increase the value of property, such as assessment fees for building a new sidewalk. If any of these amounts are included in the amount paid, subtract the non-deductible fees before reporting on line 6.
    • You may not be able to deduct the entire amount of real estate taxes you paid, if you received assistance under a State Housing Finance Agency Hardest Hit Fund program or an Emergency Homeowners’ Loan program. Consult a Certified Public Accountant (“CPA”) or tax attorney to determine the amount you may deduct, or see IRS Publication 530 at http://www.irs.gov/pub/irs-pdf/p530.pdf for instructions on calculating the amount you may deduct.
    • If you sold your home and received a form 1099-S with the amount of real estate tax charged to the buyer listed in box 5, that amount is considered a refund of taxes you paid, and is not to be included in the amount you report on line 6.
  3. Report any mortgage interest and/or points you paid. Interest and points are reported on different lines of Schedule A, based on whether it is reported to you on form 1098 or not. Report interest and points according to these guidelines:
    • Include all interest and points reported to you on form 1098 on line 10 of Schedule A.
    • This amount will include both interest and points paid at closing, as well as interest paid throughout the year.
    • Include all interest you paid, including any amounts paid at closing, which was not reported on form 1098, on line 11 of Schedule A, along with the name and address of the person to whom you paid the interest.
    • Include all points you paid, which were not reported on form 1098, on line 12 of Schedule A.
    • If you took out any mortgages after October 13, 1987, you may only be able to deduct part of the interest you paid. See the Schedule A Instructions at http://www.irs.gov/pub/irs-pdf/i1040sca.pdf, page six (6) to determine if you may deduct all of the interest you paid.
  4. Determine if you may deduct qualified private mortgage insurance (“PMI”) premiums you paid. If the amount on line 38 of form 1040 is more than $109,000, or $54,500 if married filing separately, you may not deduce your mortgage insurance premiums.
  5. Determine the amount of qualified PMI premiums you paid. The amount should be shown in box 4 of form 1098, and will include both premiums you paid at closing and those that you paid throughout the year. If your qualified PMI premiums are not listed on form 1098, request that your insurance carrier provide you a statement showing the amount of qualified PMI premiums you paid. The total amount of premiums should be reported on line 13 of Schedule A. When reporting qualified PMI premiums keep in mind:
    • Qualified mortgage insurance is insurance issued by the Department of Veteran Affairs, the Federal Housing Administration, or the Rural Housing Service.
    • Qualified premiums reported must have been paid on a mortgage insurance contract entered into after December 31, 2006 to be deductible on Schedule A.
    • If the amount on form 1040 line 38 is more than $100,000 ($50,000 if you are married filing separately), you may not take the full amount of your premiums as a deduction. Use the Mortgage Insurance Premiums Deductions Worksheet on page seven (7) of the IRS Schedule A Instructions located at: http://www.irs.gov/pub/irs-pdf/i1040sca.pdf to figure your deduction.
  6. Complete the rest of Schedule A. If you have medical and dental expenses, gave charitable gifts, paid other deductible taxes, suffered a casualty or theft loss, paid certain job related expenses, or any other deductible expense, include it on the appropriate line of Schedule A. Follow the instructions on the Schedule, or see the IRS Schedule A Complete Instructions at: http://www.irs.gov/pub/irs-pdf/i1040sca.pdf.
  7. Report your total deductions on form 1040. Include the amount shown on line 29 of your Schedule A on line 40 of your 1040. Do not forget to include Schedule A and all other Schedules, Forms, and Attachments with your Form 1040 when filing your taxes.



Tips

  • If you chose to utilize tax preparation software, be sure to review each form and schedule the software prepares for typos and missing or incorrect information.

Warnings

  • Before making any decision, which will affect your legal rights and obligations under the tax laws, you should consult a CPA or licensed tax attorney.
  • Closing costs associated with refinancing a mortgage have different rules for what is deductible and how it may be deducted. Be sure that you check the specific rules for refinanced mortgages before deducting those closing costs on your federal income taxes.
  • Itemizing your deductions means you are electing to take your actual itemized deductions instead of the standard deduction for your filing status. If your itemized deduction is less than your standard deduction, you should consult with a tax attorney or CPA before choosing to take the lesser deduction.

Things You'll Need

  • IRS form 1040 or 1040A
  • IRS Schedule A
  • Calculator
  • Pencil

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Sources and Citations

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