In the Rent vs. Buy discussion, the income tax deductibility of monthly interest and property taxes was explained. But besides these tax deductible items, elements of the closing costs are also tax deductible.
Origination fees and points
Loan origination fees and discount points (items #801 and #802 on the
settlement statement) qualify as an itemized interest deduction.
Prorated real estate taxes
When buying or selling property, a major tax deduction many real estate buyers and sellers overlook is the prorated property tax they paid at the close of escrow. Even if the other party remitted the payment to the tax collector,
but you were charged a prorated portion of the tax bill, be sure to deduct your share on your income tax return.
Deduct prorated mortgage interest in the year of property purchase or sale
Similarly, if you bought a residence and took over an existing mortgage, don’t forget to deduct your prorated interest share for the month of the sale. Your
final closing/settlement statement shows your prorated share of the mortgage interest.
Mortgage prepayment penalty
If you paid off an existing mortgage early and were charged a prepayment penalty by the lender, that prepayment penalty qualified as an itemized deduction.
When land rent payments qualify as interest deductions
Million of homes are located on leased land. Internal Revenue Code 163 allows land rent to be deducted like interest when the lease; (a) is for at least 15 years, including renewal periods; (b) is freely assignable; (c) contains a
present or future option to buy the land; and (d) is like a security interest, such as a mortgage. Payments to buy the land are not deductible, nor are ground rent payments deductible if you do not have the option to buy the land,
such as in a mobile home park.
Home construction loan interest
If you plan to build a new home, or are building one now, don’t forget to deduct the construction loan interest paid. It’s deductible if the construction period does not exceed 24 months before occupancy of your principal residence.
Deduct prepaid property taxes and mortgage interest.
If you prepaid next year's real estate taxes last year, as homeowners do to increase their tax deductions, or if you pay
prepay your January mortgage payment in December of the previous year, don’t forget to deduct these extra mortgage interest and property tax payments
on your income tax return.