What Closing Costs Are Tax Deductible When Selling a Home?

Wondering which closing costs can provide tax deductions when selling a home? Keep reading to get the answers and useful tax-saving tips.

Selling Your Home
December 14, 2023
What Closing Costs Are Tax Deductible When Selling a Home?

The process of selling a residence often costs thousands, or even tens of thousands, of dollars. While buyers often cover many individual line items that crop up during closing, sellers shoulder the total burden of realtor commissions and some additional taxes and fees. 

In most states, sellers can anticipate closing costs of between 2–5% of the property sale price (or 6–10% if you include commissions).,

Although you don't need to have cash on hand, it's still a significant amount to be deducted from your sale proceeds. You can whittle away at some of the burden through negotiation, shopping around, and understanding what closing costs are tax deductible when selling a home.

What Are Closing Costs?

When you sell a property, there’s a lot more involved than just handing over your keys and receiving a bag full of cash. Real estate transactions usually involve government filings, taxes, multiple financial stakeholders, and a pile of paperwork to comply with each state’s regulations. 

Buyers and sellers have unique sets of closing costs that they traditionally pay for, although that can vary based on specific state guidelines and individual sale negotiations. 

In general, the home seller pays all real estate agent commissions (buyer’s and seller’s) plus these closing costs: 

  • Property or deed transfer taxes required by the jurisdiction(s)
  • Filing or recording fees required by the jurisdiction(s)
  • Seller’s escrow fees
  • Seller’s title insurance policy to protect against future legal claims
  • Attorney fees if required by your state or engaged at your discretion

If not already paid, you’ll also owe for these items at closing: 

  • Prorated property tax coverage through closing date
  • Prorated HOA ongoing maintenance fees
  • HOA account balance of any past charges
  • Outstanding liens and judgments against the property

Depending on your contracts and prior negotiations, you may also need to fund: 

  • Seller concessions, contributions, or credits negotiated to benefit the buyer
  • Prepayment penalty if required by a mortgage contract you’re paying off
  • Home equity or HELOC balances (and potential prepayment penalties)

About three days prior to your closing, you’ll get a disclosure statement that provides a run-down of all closing costs and their exact amounts. It will show how much will be transferred to your current lenders if you have outstanding mortgage debt and the exact figure that will be wired to your bank account or handed to you via check. 

Review it carefully for errors and ask questions of your agent, lawyer, or the title or closing company if anything is unclear. 

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Itemized Deductions: How to Deduct Closing Costs

Most closing cost deductions fall under the capital gains umbrella (more on that below), but there are a few items that you might see on your closing disclosure that apply to Schedule A, Itemized Deductions, of your federal 1040 or 1040-SR income tax return. 

These include: 

  • Up to $10,000 in property taxes paid through closing date
  • Mortgage interest paid through closing date
  • The value of discount points not previously deducted

Based on the 2017 tax code change, which nearly doubled the standard deduction amount, many taxpayers don’t end up opting to itemize deductions any more. If you do itemize, however, be aware that there are limits on these deductions—so read the Schedule A instructions carefully or consult a tax specialist.

Real Estate Capital Gains: How to Deduct Closing Costs

A capital gain is a profit received from the sale of an asset, such as the significant payout you’ll receive when you sell your home. Capital gains are taxed differently from income, and the gains from sale of a residence have their own rules. 

The IRS doesn’t start collecting on capital gains from the sale of a home until the profit exceeds the exclusion limits, which are: 

  • $250,000 for a single filer
  • $500,000 for a married couple filing together

Even better, profit is determined by subtracting specific expenses, such as numerous closing costs, from the sale price of your home.

For instance, if you sell a home for $275,000, you would normally be taxed on $25,000 (after the $250,000 exclusion). But if your selling expenses totaled $25,000, then you wouldn’t owe a nickel in capital gains taxes. 

Who Can Deduct Closing Costs? 

Selling expenses can be deducted from capital gains tax if you meet certain qualifications. These include: 

  • The expenses must be directly tied to the sale of the home
  • The home sold is your principal residence, not a second or vacation home
  • At least one seller has owned the home for at least two of the past five years
  • You’ve lived in the home for at least two of the past five years
  • You haven’t used this capital gains tax exclusion during the past two years
  • If sellers are married, they must file jointly to use the capital gains exclusion

Understanding what closing costs are deductible when selling a home can be a bit tricky if you pore through the IRS guidelines, as they tend to include every exception to every rule. Either connect with a tax professional or at least walk through the various worksheets and read the fine print within Publication 523, Selling Your Home, to make sure your circumstances don’t prohibit you from taking these deductions. 

Which Closing Costs Are Tax-Deductible?

While the list of seller closing costs tends to be fairly short, state regulations and individual negotiation and concessions can lead to more items coming in under the seller. 

Of these, closing costs that can be deducted through the capital gains exclusion include: 

  • Title and abstract search and clearing charges
  • Title insurance
  • Filing or recording fees required by the jurisdiction(s)
  • Property or deed transfer taxes required by the jurisdiction(s)
  • Real estate attorney fees
  • Miscellaneous legal fees
  • Notary fees
  • Escrow fees
  • Real estate agent and broker commissions
  • Points paid by the seller to assist the buyer’s financing

Additional Selling Costs to Lower Capital Gains Taxes

When you figure out your home selling costs total to reduce any capital gains you owe, there are more items to include beyond what you pay at closing. Be sure to keep track of these expenditures that you incur prior to closing: 

  • Appraisals
  • Pre-sale home inspections
  • Survey fees
  • Utility installation charges
  • Home repairs made within 90 days prior to closing date to help sell the home
  • Depreciated value of home improvements within 90 days prior to sale
  • Home staging
  • Advertising
  • Products and services purchased in conjunction with an FSBO (for sale by owner) sale

Which Closing Costs Are Not Tax-Deductible?

Not every line item can be deducted. You can’t include these costs when it comes to tax deductions:

  • Homeowners insurance premiums
  • HOA fees
  • Utility costs

Also note, not every pre-closing cost that you consider part of the selling process can be deducted from your capital gains taxes. This includes general upkeep such as lawn mowing or housecleaning that doesn’t qualify as capital improvement.

Further, your list of deductions and requirements will change if you have special circumstances such as: 

  • Military status 
  • Property history that includes business use of a home
  • Rental or investment property status within prior years
  • Original property purchase via a like-kind (or 1031) exchange
  • Expatriate tax status

Learn if homeowner’s insurance is tax deductible in our guide. 

How Important Is It to Check with a Tax Professional?

If you’re accustomed to going it alone with your tax prep, you may want to make an exception for the year of a home sale. Effective decision-making prior to a sale and the subsequent tax filing both demand meticulous preparation to fully take advantage of all available tax deductions and exclusions.

Tax laws related to home sales and capital gains see frequent changes, so you may want a tax professional by your side. 

Streamline Your Closing Costs with Truehold

Keeping your costs low when selling a property includes knowing which costs are tax-deductible and which you can reduce or eliminate. You can also lower your expenses by looking beyond traditional home sales at cash offers, including sale-leasebacks.

A residential sale-leaseback allows you to skip the weeks or months devoted to preparing a property for an open house and buyer showings. With Truehold's sale-leaseback, you’ll also save the time that goes into a traditional sale. 

Truehold provides a simple and quick closing at a competitive price, and you don’t have to pack up and leave right away. At closing, you’ll sign a lease agreement and switch from the owner to a renter.

Our clients unlock their home equity, pay off any remaining mortgage debt, and are no longer responsible for property tax or homeowners insurance. Plus, Truehold takes over the hassle and expense of major repairs and maintenance. 

Ready to find out if a sale-leaseback is a good fit for your needs? Reach out to us, and a Truehold Advisor will explain the process and answer your questions. 

Sources: 

  1. Bankrate. How much are closing costs for home sellers? https://www.bankrate.com/real-estate/closing-costs-for-sellers/
  2. Nerdwallet. What Are the Closing Costs for a Home Seller? https://www.nerdwallet.com/article/mortgages/closing-costs-home-seller
  3. IRS. 2022 Instructions for Schedule A (2022). https://www.irs.gov/instructions/i1040sca
  4. Maximum Real Estate Exposure. Tax Deductions When Selling a House: What to Know. https://www.maxrealestateexposure.com/tax-deductions-selling-home/
  5. Realtor.com. 5 Tax Deductions to Take When Selling a Home. https://www.realtor.com/guides/homeowners-guide-to-taxes/tax-deductions-when-selling-a-home/
  6. IRS. Sale of Residence - Real Estate Tax Tips. https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-residence-real-estate-tax-tips
  7. IRS. Topic No. 701, Sale of Your Home. https://www.irs.gov/taxtopics/tc701
  8. IRS. About Publication 523, Selling Your Home. https://www.irs.gov/forms-pubs/about-publication-523
  9. LendingTree. Closing Costs That Are (and Aren’t) Tax-Deductible. https://www.lendingtree.com/home/mortgage/are-closing-costs-tax-deductible/
  10. Nerdwallet. Capital Gains Tax on Real Estate and Home Sales. https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax
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