Real Estate Tax CalcWhat buyers can and cannot deduct at closing
From the buyer's side of the closing table, the tax picture is straightforward but limited. Three categories can produce a deduction: mortgage discount points that clear the IRS requirements, the prepaid interest from your closing date to month-end, and your allocated share of prorated real estate taxes. Every other buyer-paid closing cost — title insurance, appraisal, attorney fees, recording fees, escrow fees, home inspection, credit report charges — is either added to your adjusted basis or simply a personal non-deductible expense.
The gap between what buyers pay and what they can deduct surprises many first-time homeowners. A buyer who pays $12,000 in closing costs might be able to deduct $3,500 in points plus $800 in prepaid interest, and will claim $2,200 in prorated property taxes — leaving roughly $5,500 that has no immediate tax benefit beyond building basis. Understanding this split in advance sets realistic expectations and helps you document basis correctly from day one.
The IRS tests for deductible mortgage discount points
Mortgage points are prepaid interest, and the IRS allows buyers to deduct them in the year paid — rather than amortizing them over the loan term — only when all of the following conditions are satisfied.
First, the loan must be secured by your main home (not a second home or rental). Second, paying points must be an established practice in your geographic area. Third, the points charged must not exceed the rate typically charged in that area. Fourth, you must use the cash method of accounting, which almost all individual taxpayers do. Fifth, you must not have borrowed the funds for the points from your lender — if points are rolled into the loan balance, they are not paid with your own funds and are not deductible in the purchase year. Sixth, the charges must be clearly labeled as points, loan discount, discount points, or mortgage points on the settlement statement or Closing Disclosure. Generic "origination charges" or "lender fees" do not automatically qualify even if they are computed as a percentage of the loan.
Seventh, the funds you bring to closing — your down payment plus closing costs — must equal or exceed the amount of the points. You cannot deduct points funded by the seller. Eighth, the loan must be used to buy, build, or substantially improve your main home. Points on a home equity loan for home improvements may also qualify under a separate set of rules in IRS Publication 936.
When all tests are met, the points are fully deductible on Schedule A as home mortgage interest in the year of the purchase closing — a potentially large one-time deduction. When any test fails, the points must be amortized over the life of the loan, just as refinance points are.
How to find deductible items on your Closing Disclosure
Your Closing Disclosure (CD) is a five-page standardized form required for most residential mortgage closings. It replaced the old HUD-1 Settlement Statement in 2015. Buyers looking for potentially deductible items should focus on two sections.
Page 2, Section A ('Origination Charges') and Section B ('Services You Cannot Shop For') — this is where lender points appear. Look for line items explicitly labeled 'points,' 'discount points,' or 'loan discount fee' expressed as a percentage of the loan. Page 3 shows your total cash to close and summarizes prepaid items and escrow setup. The 'Prepaids' section on page 2 (Section F) typically shows prepaid homeowner's insurance, prepaid mortgage interest (the per-diem days from closing to month-end), and initial escrow payments — the mortgage interest line is the deductible one.
Property taxes in the proration section on page 3 show the split between the seller's share and your share. Your share is potentially deductible as real estate taxes. Keep this page because it establishes both what you paid and who paid it — information that is hard to reconstruct later.
Prepaid mortgage interest: the per-diem days
When you close any day other than the last business day of the month, your lender collects interest for the remaining days of that month at closing. If you close on October 10, you owe interest for October 10 through October 31 — 21 days at your daily interest rate. This per-diem interest appears on page 2 of the Closing Disclosure as 'Prepaid Interest ($X/day for Y days).'
This amount is deductible home mortgage interest in the year of purchase, subject to the overall mortgage interest deduction limits (which apply to acquisition debt up to the applicable limit — consult IRS Publication 936 for the current amount). Your lender will include it in the mortgage interest reported on Form 1098 for the year of closing. The deduction is only available if you itemize on Schedule A.
Prorated real estate taxes: your share from the closing date
Real estate tax prorations at closing represent the portion of the annual property tax bill that covers the period you owned the home in that tax year. If property taxes run $6,000 per year and you close on October 1, your share for the year is roughly $1,500 (three months). That amount is typically credited to you by the seller or collected from you depending on the payment schedule in your state, and it is deductible as real estate tax on Schedule A.
The key documentation is the settlement statement showing who paid what. In states where the seller pays taxes in arrears, you receive a credit at closing and then pay the full tax bill yourself later — in that case, your deductible property tax for the year equals the full prorated amount, not just what you paid out of pocket. Misunderstanding the direction of the proration is a common source of errors.
Points paid by the seller on your behalf
A seller can agree to pay your loan discount points as part of the sale negotiation. These seller-paid points are deductible by you, the buyer — not the seller. The IRS treats seller-paid points as if you paid them yourself from the purchase price, with one adjustment: you must reduce your basis in the home by the amount of the seller-paid points.
This is a favorable outcome for buyers. If a seller agrees to pay two points ($8,000 on a $400,000 mortgage) and you meet all the IRS tests, you deduct $8,000 in points even though that money came out of the seller's proceeds. The trade-off is a $8,000 reduction in your starting basis, which increases the gain if you sell later. For most buyers who plan to stay long-term, the immediate deduction is worth more than the deferred basis reduction.
Fees that look like points but are not
Lenders charge many fees at closing — origination fees, underwriting fees, application fees, processing fees, and rate-lock fees. Some of these are expressed as a percentage of the loan and superficially resemble points. They are not deductible as points unless the Closing Disclosure explicitly labels them as discount points, loan discount, or points, and they meet all the other IRS tests.
Common non-deductible lender fees that buyers sometimes try to claim as points: origination fees labeled as a flat dollar amount or percentage for processing the loan (not for reducing the rate), fees for specific services like appraisal review, wire fees, credit report costs passed through to you by the lender, flood certification fees, and mortgage broker commissions. These are either non-deductible acquisition costs (add to basis) or must be amortized if they are loan costs under the tax accounting rules for the lender. The label on the CD matters: if it does not say 'points,' proceed carefully before claiming an immediate deduction.
What to do with non-deductible buyer closing costs
Non-deductible buyer costs — title insurance, attorney fees, appraisal, recording fees, escrow fees, home inspection, survey, transfer taxes paid by the buyer — are not wasted for tax purposes. They add to your adjusted basis in the home.
A higher basis means a lower taxable gain when you sell. If you sell your home for $700,000 and your adjusted basis is $400,000 (including $15,000 of closing costs from the purchase), your gain is $300,000. With the Section 121 exclusion ($250,000 single / $500,000 married), much or all of that may be tax-free. But if you lose track of the $15,000 in closing costs and understate your basis, you could pay tax on a larger gain than you actually had. Keeping the original Closing Disclosure in your permanent tax file — or scanning and saving it digitally — is a small effort with potentially large long-term value.
Frequently asked questions
What closing costs can a home buyer deduct?
Buyers can deduct mortgage discount points (if the IRS tests are met), prepaid mortgage interest from the closing date to month-end, and their prorated share of real estate taxes for the portion of the year they owned the home — but only if they itemize.
Are origination fees the same as discount points?
Not always. Discount points specifically buy down your interest rate and can be deductible. Generic origination fees for processing your loan typically are not deductible as points in the purchase year unless labeled as discount points on your Closing Disclosure.
Are closing costs deductible if you don't itemize?
No. All home purchase closing cost deductions — points, prepaid interest, property taxes — require you to itemize deductions on Schedule A. If the standard deduction is larger, these costs provide no incremental benefit beyond building your basis.
Can seller-paid points be deducted by the buyer?
Yes. Points the seller pays on your behalf are deductible by you, the buyer, in the purchase year — provided the IRS tests are met. However, you must reduce your basis in the home by the amount of seller-paid points.
Where do I find mortgage points on the Closing Disclosure?
Look on page 2 of the Closing Disclosure in Section A ('Origination Charges') for any line explicitly labeled 'discount points,' 'loan discount,' or 'points.' The amount and the percentage of the loan are shown there.
What if the lender rolled my points into the loan balance?
Points financed into the loan balance are generally not deductible in the purchase year because you did not pay them with your own funds. They must be amortized over the loan term.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.