Can I Deduct Closing Costs From My Taxes?

If you are looking for a new place to live, there are a lot of benefits that come with owning a home. For example, a home is a great investment that could increase in value with time. You are also going to have more control over what you do in your space. You can make improvements, develop wealth, and improve your overall standard of living. At the same time, you do need to make sure you are prepared for the expenses of home ownership.

Even though you are probably thinking about your mortgage payment, you also need to think about closing expenses. What are closing costs, and are they tax-deductible? If you are curious about tax deductible closing costs, there are several important points you should keep in mind.

What Are Closing Costs?

Closing costs are the fees that you have to pay in order to obtain your mortgage loan. Even though there are some people who purchase a home in cash, this is not possible for most people. Therefore, if you are purchasing a home, you may need to go through a mortgage lender who can give you a home loan.

Even though there are a lot of smaller fees that are included in closing costs, they can add up relatively quickly. In general, you should be prepared for closing costs that range between two percent and five percent of your home loan amount. As an example, if you purchase a home that comes with a $200,000 mortgage, you could have to pay closing costs that range from $4,000 to $10,000. Therefore, you need to make sure that you are ready to pay these expenses as well.

Are Closing Costs Tax Deductible?

Even though it can be frustrating if you are surprised by a lot of these expenses, there may be opportunities for you to save money. For example, some of your closing costs could be tax-deductible. The rules and regulations surrounding tax deductions change frequently, particularly in the real estate world. Therefore, if you have questions or concerns about what tax deductions you can claim, you should reach out to a tax professional for help.

There are several examples of real estate expenses and closing costs that could be tax-deductible. A few common examples include:

• Mortgage Interest: Interest on your mortgage payment is one of the biggest deductions you might be able to claim. Based on the amortization schedule provided by your lender, the majority of your mortgage payment is going to go toward interest during the first two years of your mortgage. Then, during the later years of your mortgage, most of your payment is going to go toward the principal. This means that your tax deduction could be bigger at the beginning of your mortgage payment than at the end of your mortgage. This is something you'll want to keep track of, but you should also receive a yearly statement from your lender when taxes are due.
• Discount Points: If you are interested in getting a lower interest rate on your mortgage, you may want to pay something called a discount point. Your lender is going to talk about this with you in detail. You may also want to work with a professional adviser who can figure out if it is worth it to pay more money upfront to get a lower interest rate on your mortgage. This is something that could be tax-deductible, but you need to talk to a tax professional to make sure you claim this deduction appropriately.
• Real Estate Taxes, Local and State: Your monthly payment is probably going to include your mortgage, your homeowners’ insurance expenses, and potential real estate taxes. Fortunately, real estate taxes could also be tax-deductible. You may have state and local taxes you need to pay. If you want to claim this deduction, you should talk to a tax professional who can make sure you do so properly.
• Primary Mortgage Insurance (PMI): If you do not put 20 percent down on your mortgage, you may have to pay something called private mortgage insurance, or PMI. PMI is something that lenders charge that protects them in the event you are unable to repay your loan. Through the end of 2020, this expense was also tax-deductible. You should talk to a tax professional to see if the deduction was renewed. If so, this is another expense you might be able to claim.

These are just a few of the most common expenses that could be tax-deductible. Even though closing costs can be substantial, you may be able to save money by claiming a few of these tax deductions. Because rules and regulations surrounding tax deductions change frequently, you need to work with a real estate professional who can guide you in the right direction.

Itemizing Your Deductions vs. The Standard Deduction

As you were taking a closer look at your tax-deductible closing costs, you may realize that these add up quickly. At the same time, you need to compare these closing costs to the standard deduction. You are only going to be able to claim these tax deductions if you decide to itemize your deductions. You need to figure out which option is better for you.

If the total cost of your itemized deductions is greater than the standard deduction, then you will probably want to itemize your deductions. On the other hand, if you do not have a lot of other deductions to claim, then it may still be better for you to claim the standard deduction.

This can be a complicated calculation, so it is critical for you to employ a tax professional. If you are trying to figure out the best way to save money on your taxes, including your tax-deductible closing expenses, then you should reach out to an accountant who can assist you.

Count on Mike Glisson, Ormond Beach Realtor, To Help You

There is a lot involved in purchasing a home. Therefore, you need to make sure you place yourself in the best position possible to be successful. If you are looking to buy or sell your home, you need to maximize your value. With this in mind, you should partner with a professional real estate agent who understands the local area.

If you are looking for a real estate agent to help you, then reach out to Mike Glisson today. Even though the real estate market is competitive, there are still steps you can take to get the most for your money. Contact us today to learn more about how we can help you!