One of the most common questions borrowers ask after closing is: "Which of these closing costs can I deduct on my taxes?" The answer depends on whether the property is your primary residence, a rental property, or an investment, and on the specific nature of each closing cost. Some costs are fully deductible in the year paid, some are amortized over the life of the loan, and some are capitalized into the property's cost basis and recovered through depreciation over decades. Here's a line-by-line breakdown.
Deductible in the Current Year
These closing costs can be deducted on your tax return for the year of closing, subject to standard limits and phaseouts:
- Mortgage interest (including prepaid per diem interest): Deductible as home mortgage interest on Schedule A (primary residence) or Schedule E (rental property). For primary residences, the deduction is limited to interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). Investment property mortgage interest is not subject to this cap.
- Property taxes paid at closing: Deductible as state and local taxes on Schedule A for primary residences, subject to the $10,000 SALT cap ($5,000 if married filing separately). Fully deductible on Schedule E for rental properties with no SALT cap.
- Mortgage insurance premiums (PMI/MIP): Deductible on Schedule A for primary residences if your adjusted gross income is below $109,000 ($54,500 if married filing separately). The deduction phases out completely at $109,000. This deduction must be renewed annually by Congress and has historically been extended year by year.
Amortized Over the Loan Term
These costs are deducted proportionally over the life of the loan:
- Loan origination fees: Amortized over the loan term (typically 15 or 30 years). For a $3,000 origination fee on a 30-year loan, that's $100 per year in deductible loan costs. If you refinance, any remaining unamortized balance from the old loan becomes fully deductible in the year of refinancing.
- Discount points: Generally amortized over the loan term. However, points on a primary residence purchase loan may be fully deductible in the year paid if they meet the IRS's nine-point test: the points must be computed as a percentage of the loan amount, be a standard practice in the area, be paid from the borrower's separate funds at closing, and be clearly identified as points on the settlement statement.
Capitalized into Cost Basis (Depreciated)
These costs are added to the property's cost basis and recovered through depreciation over 27.5 years (residential rental) or 39 years (commercial). They provide no immediate deduction:
- Title insurance (both lender's and owner's policies)
- Legal and attorney fees for document preparation
- Recording fees
- Transfer taxes
- Survey fees
- Appraisal fees
- Any cost directly related to acquiring the property
Primary residence vs. investment property: key difference
For a primary residence, the practical question is simpler: can I deduct this on Schedule A? Most closing costs cannot. Only mortgage interest, property taxes, and (conditionally) mortgage insurance premiums appear on Schedule A, and they are all subject to caps. For investment properties, the question is: does this reduce my current-year Schedule E income, or does it increase my depreciable basis? The difference matters because a $1,000 cost deducted immediately saves approximately $240-370 in taxes at typical marginal rates, while the same $1,000 cost added to depreciable basis saves about $10-15 per year for 27.5 years. The net present value heavily favors immediate deduction.
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Former mortgage underwriter and PropTech builder. Jordan spent 8 years reviewing Closing Disclosures at a top-20 US lender before founding ClosingSense to make CD data extraction instant for real estate professionals. Full bio →