Are Closing Costs Tax Deductible When Selling a House?
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Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
When selling your home, it’s likely you’ll focus on the proceeds you’ll earn and the taxes you may need to pay. But there are expenses involved that may be tax deductible. In this post, we explore the question: Are closing costs tax deductible?
Let’s take a look at which fees might qualify for tax deductions and which can reduce your capital gains taxes.
What are examples of seller closing costs?
When selling a home, you’ll encounter various closing costs as part of the process. On average, sellers pay between 2% and 5% of a home’s sale price in closing costs. If you count real estate agent commissions (technically not a closing cost), the percentage increases to a range of 6% to 10%.
For perspective, the median home price in the U.S. ranges from $345,000 to $420,000, depending on the data source. If you sell your house for a mid-range price of $385,000, you can expect to pay anywhere from $23,100 to $38,500 in seller closing costs.
Here’s a breakdown of some common closing costs sellers typically cover:
- Title search and insurance
- Transfer taxes and recording fees
- Attorney fees (if required or preferred)
- Seller-negotiated concessions or credits
- Prorated property taxes and HOA fees
- Any outstanding liens and judgments
- Home warranty (if offered to the buyer)
- Real estate agent commissions
Some other possible deductions at closing include:
- Home equity loan or HELOC balances
- Prepayment loan penalties (if required by your lender agreement)
Are closing costs tax deductible?
The answer is a mix: Some closing costs are tax deductible, while others are not but can reduce your taxable capital gains.
Just before your closing date, you’ll receive a disclosure statement. This document provides a detailed breakdown of all your closing costs, showing how much will go to your mortgage lender, as well as the amount you’ll receive from the sale, either through a bank transfer or check.
Carefully review this disclosure to ensure accuracy. If you have questions, reach out to your listing agent, attorney, or the closing company, and they should clarify any uncertainties.
Now let’s break down this mixed answer to see exactly how some closing costs can be tax deductible.
Itemized deductions: Closing costs that qualify
While most closing costs don’t qualify for direct tax deductions, certain expenses on your seller’s disclosure can be itemized on IRS Schedule A of your 1040 or 1040-SR tax return. These itemized deductions include:
- Property taxes paid through your closing date (up to $10,000)
- Mortgage interest paid through your closing date
- Loan discount points not previously deducted
Due to new, higher standard deductions, many taxpayers choose not to itemize their taxes. Those who do should review IRS Schedule A instructions carefully or consult a tax advisor, as limits may apply based on your specific income and filing status.
As noted above, while other closing costs may not be deductible, they can reduce your tax liability on the sale proceeds or gains.
Selling expenses: Deductions from capital gains tax
When you sell a home, capital gains refer to the profit you make from the sale above the property’s purchase price. For many homeowners, a capital gains exclusion allows you to exclude up to $250,000 (or $500,000 if married and filing jointly) of this gain from federal taxes, provided the IRS’s qualifying conditions are met.
Certain closing costs can be deducted from your sale price to lower your taxable capital gain. These costs become part of your home’s adjusted basis, effectively reducing the profit subject to capital gains tax. The IRS permits several types of fees and costs to be included in your basis, provided they meet the following criteria:
- Connected cost: Must be directly tied to the sale of your house
- Primary residence: Must be your principal or primary residence
- Ownership requirement: Owned the home for at least two of the past five years
- Residency requirement: Lived in the home for at least two of the past five years
- Exclusion frequency: Not used the tax exclusion within the past two years
- Joint filing: If married, the couple must file jointly to apply the exclusion
Deductions that can reduce your taxable capital gains
Let’s look at some specific examples of closing costs or selling expenses that can reduce your taxable capital gains — and some that the IRS won’t allow you to apply.
Taxable capital gain reduction: Eligible closing costs
Examples of selling expenses that may be able to be deducted through the capital gains exclusion include:
- Title and abstract search fees and clearing charges
- Title insurance fees and transfer (stamp) taxes
- Fees to record or file the purchase with local authorities
- Required property or deed transfer taxes
- Real estate attorney fees
- Other legal fees (title search, deed, and sales contract prep)
- Notary and escrow fees
- Fees for land surveys required for the sale
- Real estate agent and broker fees
- Points paid by the seller to assist the buyer’s financing
- Charges for installing or connecting utility services
- Pre-sale home inspections and appraisals
- Home repairs to help sell the home (within 90 days of closing)
- Depreciated value of home improvements (within 90 days of closing)
- Home staging and seller-paid advertising costs
- Services related to a for-sale-by-owner (FSBO) sale
Did you make major improvements? Adding the cost of major improvements to your home’s total basis can significantly reduce your capital gains tax. However, you must be able to distinguish between repairs and improvements and have records documenting the expenses.
Taxable capital gain reduction: Ineligible closing costs
Not all closing costs or selling expenses are eligible for reducing your capital gains tax. Costs that typically cannot be included are:
- Fire and casualty insurance premiums
- Pre-closing occupancy expenses such as rent or utility charges
- Mortgage insurance premiums, fees, or lender-required appraisals
- Discount points or origination fees on your next mortgage loan
Additionally, other pre-closing costs like general maintenance or upkeep, including lawn care, landscaping, and cleaning services, do not qualify for deduction from capital gains taxes.
Partner with professionals when selling a house
As you can see, answering the question, “Are closing costs tax deductible when selling a home?” can be tricky. The IRS guidelines include every possible exception to every tax rule. HomeLight recomments you reach out to a trusted tax professional. You can also read IRS Publication 523 (Selling Your Home) to learn more about your eligible deductions.
For a smoother selling experience, consider working with a results-proven real estate agent. HomeLight can connect you with top agents in your area, bringing valuable insight and expertise to the home sale process.
A seasoned local agent can help you understand your seller’s disclosure, avoid tax surprises, and ensure you maximize your profits.
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