Today, the settlement statement has a new name – it’s the Closing Disclosure. Either way, the statement itemizes the cost of closing on your loan. It includes all charges from the lender, third parties, and all prepaid expenses, such as interest, taxes, and insurance.
What many homebuyers want to know is if you can deduct any of the items on the closing disclosure on your taxes. We dive into the topic below.
The Standardized Deduction
First, it’s important to note that the standardized deduction has increased thanks to the Tax Cuts and Jobs Act. Today, taxpayers can deduct $12,200 for single filers and $24,400 for married filing joint filers. If you don’t have itemized deductions that exceed this amount, itemizing your deductions doesn’t make sense.
If you don’t itemize your deductions, you can’t deduct any of the items on your Closing Disclosure. In order to write off the closing costs you paid, you must itemize the deductions. So start there. If you think you have more deductions than $12,200 or $24,400, then read on to see what you can deduct.
Loan Origination Points
Loan origination points are like prepaid interest. Lenders charge the points to make up for the riskiness of your loan or to lower your interest rate. Either way, it’s interest they collect at the closing. You can deduct this cost on your taxes. You can only take the deduction if the home is your primary residence, though.
Just like loan origination points, prepaid interest is mortgage interest and you can deduct it. Prepaid interest covers the interest on the loan from the closing date through the end of the month. Your first mortgage payment won’t occur until approximately 45 days after closing. For example, if you close on March 15, you won’t have your first payment due until May 1st. That May 1st payment covers the interest for the month of April.
It’s your responsibility to cover the interest from March 15 – the end of March. You pay this amount at the closing and can write it off on your taxes. You may see it written as per diem interest or per day interest.
Real Estate Taxes
Any real estate taxes you paid at the closing are also tax deductible. This includes taxes you paid for the upcoming bill or money you put into an escrow account to hold for tax payments. The Closing Disclosure will break down the amount you pay for the taxes, which you can write off accordingly.
Closing Costs Sellers Can Deduct
If you are the seller, you may be able to deduct a few expenses on your taxes. Just like buyers, you can deduct any property y taxes that you pay. You’ll likely pay a prorated amount since the buyer will be in the home and owe a portion of the year’s taxes. You can deduct the amount stated on the Closing Disclosure.
Sellers also benefit from closing costs that come off the bottom line. The less money sellers make at the closing, the lower his or her capital gains are. This helps reduce the cost of the taxes because the profits are lower. While it’s not a direct write off, it is a way that sellers can save on their taxes.
Closing Costs You Can’t Deduct
We talked so far about the closing costs you can deduct. It’s basically interest and taxes that you can deduct. Now let’s look at the closing costs you can’t deduct:
- Any lender fees aside from the origination points
- Third party fees, such as title or appraisal fees
- Any insurance fees
- Attorney fees
- Real estate agent commissions
- Home inspections
- Transfer taxes
Knowing what you can deduct and if you should deduct it is an important decision. Consider consulting with your tax advisor before assuming you can or can’t write off certain expenses on your Closing Disclosure. The IRS walks you through the process in their instructions, but if you want to be sure of your ability to write off a certain expense, consult with your advisor.