The truth about deducting points and closing costs

When you take out a mortgage to buy a home, or when you refinance an existing mortgage, you'll probably be charged closing costs, which typically run several thousand dollars. These costs typically include points, attorney's fees, recording fees, title search fees, appraisal fees and loan or document preparation and processing fees. It is a good idea to find out from a tax accountant if you can deduct any or all of these fees on your federal income tax return or if they were just added to the cost basis of your home.

Points are fees that a mortgage lender charges the buyer when you take out a mortgage. One point equals 1 percent of the loan amount. As a rule, homebuyers can deduct points in the year that they buy their home if they qualify to itemize their deductions. Even if the seller pays the points, which is common, the buyer can often still deduct the points. Certain conditions apply, so remember to ask your accountant.

The IRS treats the fees differently on refinanced loans. The points paid on a refinance usually have to deducted as a certain percentage each year of the loan. This is not true if any part of the loan was used to make improvements to your principal residence,. With a second mortgage for home improvements, buyers usually can deduct points in the year that they were paid.

Other closing costs are not generally deductible on your tax return. Homebuyers are wise to keep track of them to adjust the tax basis, which is the cost, of your home. If you're buying a home, you can increase your basis by adding certain closing costs to the price of the home. If you're selling a home, you'd decrease the amount of the selling by subtracting the closing costs.