Are my mortgage closing costs tax deductible?

Mortgage closing costs can be expensive, but these five in particular can be tax deductible.

As a first-time home buyer, you might be surprised how expensive real estate can be. In addition to buying a home, homeowners also need to budget for closing costs, which are typically between 3% and 6% of the total loan amount.

In context, this means that if the purchase price of your home is $ 250,000, you could pay up to $ 15,000 in estimated closing costs. So it makes sense to save money wherever possible. And at some point you may have wondered whether your acquisition costs are tax deductible.

A subscription fee, an admission fee, an appraisal fee, an attorney’s fee, a research fee, and even a credit report fee are examples of costs that will be payable in closing your home. In addition, seller concessions are closing costs paid by the seller of the home you bought.

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When it comes to mortgage write-offs, homeowners can avail of tax deductions on their property taxes and mortgage interest. However, you will be surprised at how much of your closing costs fall under this umbrella.

5 tax-deductible mortgage completion costs

The current standard deduction is $ 12,400 for singles and $ 24,800 for married couples, according to the Internal Revenue Service (IRS). Any tax deductions that you receive from your closing costs are therefore only beneficial if they total more than the standard deduction.

Let’s look at five mortgage closing costs that are tax deductible for homebuyers. And when you’re ready to explore your mortgage options, visit Credible to compare lending rates and mortgage lenders.

1. Lending Fee and Mortgage Points

Mortgage points are all of the fees and charges that you paid to purchase the home. Points can include things like issuing fees, rebate points, and maximum credit fees.

The IRS regards mortgage points as prepaid interest, and they can be tax deducted when you list your deductions. However, mortgage points must meet the following requirements to be tax deductible:

  • You have used the mortgage points on your primary residence
  • Paying mortgage points is an established business practice in the area in which you purchased the home
  • The points are in the normal range for this area
  • The total amount of points paid is shown on your statement of account

To learn more about your mortgage loan options, visit Credible to Compare Lenders and Mortgage Rates.

WHAT ARE MORTGAGE POINTS – AND HOW DO THEY WORK?

2. Mortgage Interest

Sometimes part of your mortgage interest will be paid during the closing and these costs will be tax deductible. You can still deduct your mortgage interest every year as long as you own this home.

3. Property taxes

Your annual property taxes are tax deductible. So if you pay part of it when you graduate, you can deduct it from your annual taxes. However, the IRS has limits on how much property tax you can deduct per year. Married couples can deduct up to $ 10,000 per year in wealth tax, or $ 5,000 if married and filing separately.

4. Mortgage Insurance

If you’ve bought a home and either waived a down payment or paid less than 20%, most lenders require you to 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, the PMI is considered tax deductible. But Congress routinely changes that, so it’s unclear whether the 2021 PMI will be tax deductible.

What is private mortgage insurance and how does it work?

You can use this mortgage calculator to determine your rates and fees, as well as the expected amount of your monthly payments.

5. Expenses for distressed real estate

Finally, if you recently purchased a distressed property, some of your expenses for maintaining or improving the property may be tax deductible. For example, if you had to pay for additional taxes or repairs, these items can be tax deductible.

The bottom line

When taking out a home loan – be it a USDA loan, VA loan, FHA mortgage, or any other – paying the closing costs is inevitable. But maybe you can save yourself some money during the tax season. You can claim the tax deductions in the year of the disbursement or during the term of the loan.

If you need help determining the items that are tax deductible, it is a good idea to work with a financial advisor or CPA. And if you want to explore your borrowing cost options during the home buying process, you can speak to one of Credible’s mortgage experts.

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Do you have a finance-related question but don’t know who to contact? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.

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