Are Closing Costs Tax Deductible?

While most closing costs are not tax-deductible, some may be deducted. Being able to point those out to your clients can allow you to add even more value for them, enabling them to make more informed financial decisions during one of the biggest transactions of their lives.

According to the IRS^[1], there are fewer than 300,000 qualified tax preparers in the US, serving a population of around 340 million. That means reliable tax guidance is hard to come by, and if you can highlight legitimate opportunities to save, you’ll stand out as a trusted resource.

What are mortgage loan closing costs?

Mortgage loan closing costs are the expenses incurred when a client gets a mortgage loan (whether it’s for a purchase or refinance). They are for the services that make the transaction possible. For example, as part of determining your eligibility for a mortgage loan, a lender may need to obtain a copy of your credit report. This cost is then passed on to you as the borrower.

Closing costs generally range from 2% to 4% of the purchase price or loan amount. They’re required on top of any down payment requirement, and explaining this to clients upfront can help reduce any unpleasant surprises and allow them to create a realistic budget from day one. 

Your loan estimate (LE) or closing disclosure (CD) is the document that outlines all of these fees. Below is a sample image of what that may look like, taken directly from the Consumer Financial Protection Bureau website.

What closing costs are tax-deductible?

If clients ever ask what closing costs are tax-deductible, they’re probably hoping to hear something along the lines of “all of them.” Unfortunately, that isn’t the case. In fact, very few mortgage closing costs are deductible. With that being said, the ones that can be deducted can still save your clients a substantial amount of money.

Mortgage interest

The portion of your mortgage payment that goes toward mortgage interest can be claimed as a tax deduction. This is on top of any mortgage interest that is paid at closing, which could be the case if you’re doing a refinance and you’re paying off mortgage interest as part of a loan payoff. 

For 2025, you can deduct interest on up to $750,000 of your loan ($375,000 if married filing separately). Mortgage interest can be deducted each year you own a qualified home, typically a primary or secondary residence. 

Discount points

Discount points, mortgage points, or points, are usually an optional fee paid by a borrower in exchange for a lower interest rate. It can almost be seen as a form of prepaid interest, since you’re agreeing to pay more closing costs upfront to get a more favorable rate on the loan. 

You can usually deduct the full amount of the points. Exceptions exist if the loan exceeds $750,000 ($1 million for loans originated prior to December 15, 2017). 

You’ll also need to meet the following requirements to be eligible for this deduction:

• Mortgage must have been used to buy or build your primary residence
• Points must have been a percentage of the loan amount
• Points must be considered a normal business practice in your area
• Points paid must not be deemed excessive for your area
• You must use cash accounting on your taxes
• Points may not have been used for items that are typically stand-alone, such as property taxes
• You must not have borrowed funds to pay for the points
• Points paid must be clearly itemized on your loan documents

Property taxes

Depending on when you’re closing and when property taxes are due for your home’s county, you may see this added to your loan documents as a cost of getting the loan. It’s not really a closing cost in the sense that it’s tied to the loan, because you’d have to pay it either way.

However, if property taxes are due soon, then this cost may be added to your loan documents to ensure that they are paid promptly, especially since your loan’s first payment might not be due for up to 60 days. 

You can generally write off up to $10,000 for property taxes ($5,000 if you’re married filing jointly).

Common closing costs that are not typically tax-deductible

In virtually all cases, any other type of closing cost listed on your loan documents won’t be tax-deductible. But again, if you want to double-check, you should consult with your trusted tax advisor.

If you want to minimize these fees, I recommend checking out our list of the best home mortgage lenders. They consistently offer low rates, fees, and excellent customer service. 

Appraisal

Many lenders require an appraisal of the property being financed to verify its value and condition. They’ll typically hire the services of a third-party appraisal management company, which then assigns a licensed appraiser to physically drive to the property for an inspection.

Home inspection

A home inspection is typically geared toward the buyer of the property. It is meant to provide the current or soon-to-be homeowner with a report of the overall condition of the home, pointing out any potential mechanical, structural, or safety issues. 

Unlike an appraisal, it does not provide a valuation estimate. Rather, it can be thought of as a more in-depth evaluation of any day-to-day issues the homeowner may be expected to run into. 

Common examples can include assessing the home’s foundation, roof, walls, plumbing systems, HVAC & electrical systems, windows, doors, and the potential presence of mold or water damage. 

Title search and title insurance

A title search is almost always done to verify the legal ownership of the property, ensuring there are also no outstanding liens or claims. This is done to ensure that the buyer has no legal issues that could appear after it’s purchased, such as someone challenging the ownership of the home or contractors placing a lien against the property for unpaid bills from a prior homeowner. 

Title insurance provides protection to the lender and title company in the event that an error was made during the title search. It’s a one-time premium that can provide financial protection in the event an issue is later discovered with regard to things like a legitimate ownership claim in the property. 

Government recording fees

Government recording fees are often assessed by the local county’s tax office to record a change of property ownership. This becomes a part of public record, typically viewable by anyone, and can include things like the deed, mortgage, and other legal documents. Recording these documents ensures that the new owner’s interest is properly safeguarded and can reduce the likelihood of ownership disputes. 

Loan origination fees

Lenders can charge an origination fee to cover their costs for processing and underwriting a mortgage loan. In other words, this fee is designed to compensate the lender for its administrative work involved with things like evaluating the borrower’s eligibility, preparing loan documents, and doing other tasks involved with funding a mortgage. 

Home-related expenses 

Any costs associated with the regular maintenance and upkeep of the property are not typically tax-deductible, even if they’re tacked onto your settlement statement as a closing cost. Common examples include homeowner’s association dues, home insurance premiums, and flood insurance.

Special case for rental property tax deductions

So far, we’ve seen that the vast majority of closing costs are not tax-deductible. However, here’s some good news. Rental properties have a bit of a special circumstance. That’s because nearly all of the closing costs you incur on a rental property are deductible in one way, shape, or form. They generally either are tax-deductible or become additions to your basis in the property. 

Tax deductible

In general, deductible closing costs are for mortgage interest, mortgage points, and real estate taxes. This can more immediately and directly reduce your tax bill when it comes to having to file your personal and business tax returns the following year. 

Addition to your basis

Almost any other cost that is not tax-deductible as described above can still help reduce your tax bill in the future because it can be added to your property’s basis.

Put simply, your basis is the amount you’ve invested in the property. When you sell, the difference between the sales price and your adjusted basis is how much profit you could be taxed on. So, as you can see, a higher basis means you’ll have a lower taxable gain. 

Tips for managing and claiming deductions

Handling tax deductions usually just comes down to being organized and keeping records of the deductions you’re entitled to. In fact, the IRS requires this for every deduction being claimed, something that could also come in handy if you’re ever audited. 

• I recommend creating a dedicated folder, whether it’s physical or digital, for your property-related expenses. This can include closing statements, mortgage statements, property tax bills, and insurance premiums. Doing so meets the IRS requirement and can also help you ensure that nothing gets overlooked and that you are minimizing your taxable income by as much as possible. 
• When it comes time to file your taxes and claim the deductions, I recommend working with a trusted tax professional. Given the complexity of real estate and federal and state taxes, working with someone who knows what forms to file is one of the best ways to avoid errors and have peace of mind if your deductions are ever questioned.

Frequently asked questions (FAQs)

Bringing it all together

As an agent, you may not be qualified or permitted to give tax advice, but understanding the basics of what closing costs are tax-deductible and which ones aren’t can enable you to more knowledgeably guide your clients to the appropriate resources to help them get the best financial outcome possible. By doing so, you’ll be reinforcing your role as their go-to person for the biggest purchase in their life and really highlight the amount of value you can provide.

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Reference:

^[1]IRS | Return Preparer Office federal tax return preparer statistics