Can You Deduct Closing Costs On Your Taxes ?
If you have taken a mortgage to purchase a home, you can avail a lot of benefits where your taxes are concerned. While many people know that they can deduct interest and taxes levied on real estate from their income tax, many are not aware that certain closing costs can also be deducted from their taxes.
However, it is important to note that not all closing costs can be deducted from the taxes and hence, a person should know which costs can be used.
Knowing which closing costs to deduct from your taxes will help to reduce the income that is taxable. This, in turn, helps to reduce the taxes that a person has to pay. It is also important to note that a person can opt either for the eligible deductions or a standard deduction for a particular tax year and not for both. So, a person should weigh this carefully and opt for a deduction that has the maximum benefit.
Some closing costs like the fees paid to the appraiser and attorney, payment for title insurance and homeowner's insurance cannot be deducted from the taxes. The same is also true for transfer taxes that a person makes.
Usually a person pays interest on the mortgage, mortgage insurance and real estate taxes in advance to an escrow account. Any escrow payments made in advance can be deducted from a person's taxes. However, the eligibility is only valid for the year when the closing of the mortgage occurs.
If a person uses discount points to get a reduction on the interest or loan origination fees can be deducted from the taxes. Again, this deduction has to be for the year when the loan closes. In case of origination fees, a person can use the entire amount if he or she is refinancing the loan. Also, the points that helped to reduce the interest should be deducted over the term of the loan. For instance, if the points used are 3 wherein one is used for origination fee and the other two for reduction in the interest, then for a given tax year, you can deduct that one point while the remaining 2 points have to be deducted over the term of the loan.
If you take a loan that is backed by the government and you pay mortgage insurance or fees for funding, you can deduct this entire amount from your taxable income.
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