Buying a new home is a huge investment that comes with a lot of tax breaks. For some, it’s the most significant investment they will make in their lifetime.
When it’s time to sit down and complete yearly taxes, homeowners often ask whether home inspection fees are tax-deductible? No, home inspection costs are not tax-deductible unless it’s for business or investment purposes. Home inspections for your home purchase or annual maintenance purposes are a personal expense, not tax-deductible. Home inspections for investment properties are tax-deductible as a business expense.
Tax deductions are a great way to reduce the amount of tax you have to pay the IRS each year – which translates into money saved that can be used for other needs.
It is good practice to understand what real estate related fees and expenses you can write off on your taxes. This, as we know, can be a complicated matter.
What Are Tax Deductions?
A tax deduction is a qualified expense paid during the calendar year that can lower one’s taxable income for that year. The expenses that are recognized as qualified deductions are subtracted from your gross income and lower their taxes.
The different states and regions will have different tax laws that will affect which expenses are considered deductible. There are two main types of deductions:
- Standard deductions – This is a set deduction taken to lower taxes based on the number of dependents and marital status. This deduction can be used if you don’t have receipts for expenses or your expenses are less than the Standard Deduction sum. The federal standard deduction for single filers and married filing separately is $12,000. You can take a $24,000 standard deduction if your status is married filing jointly or you’re filing as a surviving spouse.
- Itemized deductions – Itemized deductions are used when your allowable expense total more than the standard deduction. Typically itemized deductions include items such as home mortgage interest, property taxes, state and local income taxes, medical expenses, and charitable contributions, to name a few. For example, if you are married filing jointly, and your qualified expenses total $30,000, you can choose to use the itemized deduction of $30,000 rather than the standard deduction of $24,000.
Can You Deduct the Home Inspection on Your Income Taxes?
Buying a home is always accompanied by many expenses like home appraisals, inspections (and often several different inspections), closing costs, credit reports, and more.
Hence it is good to know what can be written off to save on your taxes.
And there are certainly some tax benefits when owning a home. So what about home inspection and home appraisal fees?
- Home inspection costs, however, are not tax-deductible as they are considered a personal expense. The only case in which an inspection fee can be deducted is when the property is purchased for a rental income or investment.
- Home appraisals are also nondeductible. The only exceptions are when the property is bought for investment purposes. If the appraisal is done for a charitable donation of a building, there are casualty losses to the home.
What Home Purchase Costs Are Considered Nondeductible
Most of the costs accompanying the purchase and the closing, however, are nondeductible. On the other hand, they are being included in the basis of your home.
- Home appraisal fees – fees paid to a real estate appraiser to value a property.
- Property surveys – fees paid for land surveys to determine property boundaries.
- Home inspection fees – fees paid to a home inspector to perform a home inspection for a personal real estate transaction.
- Pest inspection fees – fees paid to the pest control company to perform an inspection or treatment of a personal home.
- Credit report fees – fees paid to obtain a copy of credit reports or credit monitorship.
- Loan fees (not points) – loan origination fees paid to a lender.
- Title insurance – title insurance fees paid for a real estate transaction.
- Mortgage broker’s commissions – mortgage broker fees paid to write a mortgage note through a lender.
What Home Purchase Costs Are Tax Deductible?
Mortgage lenders typically do not require a home inspection. The majority of expenses, fees, and additional costs you will pay when buying your home are not deductible.
However, certain expenses can be a tax write-off like:
- Paid interest on a mortgage – interest paid to a lender for a mortgage during the calendar year.
- Mortgage buy down points – buy down rate points paid out of pocket during a real estate transaction.
- Mortgage insurance – mortgage insurance paid as part of an escrow account.
- Real estate taxes – local real estate taxes paid during a calendar year.
- Others that are non-deductible but instead added to the basis of the property.
Paid interest on the mortgage – Mortgage loans are written and dated as of the first of each month. The payment on any mortgage is paid on the first of the month, covering the month before. For example, on the 1st of January, you will be paying for December of the previous year.
If you close on any day other than the first or the last day of the month, you will owe some interest. If there are ten days left until the end of the month, there will be ten days’ worth of interest that needs to be paid to the lender.
All this interest that you have paid is, in fact, tax-deductible.
- Lender buy down points.
Lender points (also known as loan origination fees, loan discount, maximum loan charges)
Specific criteria need to be met to be eligible to deduct the full amount of the buy down points. Consult with your mortgage broker for further details.
- Property taxes
Property tax deductions are another way you can get a tax break. You might be able to get it for any tax you pay for your:
- Primary home and vacation homes.
- Co-op apartment and property outside of the US.
- Cars, RVs, boats, and other
- Mortgage interest
Even though in the past years, there were some modifications due to the tax reform. Mortgage interest is one of the best tax deductions that homeowners can enjoy.
If you are going to buy your new home by taking out a new mortgage, there is a chance you can use a mortgage interest deduction.
As of 2018, the maximum amount of mortgage that you can apply for an interest deduction is $750,000 if you are married and filing jointly or $375,000 if filing separately.
You won’t be able to claim any deduction on the amount of the loan principal that is above these amounts.
- Nondeductible expenses that are added to the home’s basis
Certain costs are not tax-deductible, but they are added to the home’s basis:
- Title insurance, recording fees, and search fees.
- Legal fees for obtaining the title.
- Any transfer taxes and survey fees.
What Are Considered Closing Costs?
When buying a new home, you will be paying closing costs. Closing is finalizing the deal and becoming the new legal owner of the building. Many of the closing costs are not deductible. However, some can be.
Usually, closing costs (or the settlement costs) are split between the buyer and the seller. The closing costs that can be deducted are the:
- Paid home mortgage interest.
- Paid real estate taxes.
These have to be deducted by itemizing your deductions the same year the home’s purchase is happening.
In some cases, loan points payment can be deducted too.
Are There Home Expenses That Can Be Deducted?
Home expenses are broken down into two main categories:
- Cost of improvements. Specific home improvements are considered tax-deductible, while others can’t be, but they become part of the home basis.
- Cost of repairs. They cannot be deducted.
Deductible Costs for Investment Properties
When buying a new house as an investment property, things change a bit.
If the property is a rental or just an investment, you can deduct more expenses and fees. If you are not purchasing a home for a personal residence or as a vacation home, the IRS is considering it a business investment.
- Mortgage interest is used for purchasing or improving the property.
- Interest on credit cards used for goods or services associated with the rental property.
- Depreciation of the rental property.
- Cost of repairs.
- Traveling expenses.
- Insurance fees, and more.
In such a case, you need to keep a very detailed record of all the costs one a home purchasing as all income and costs are filled in when doing your tax return.
Do I get a tax break for buying a house? There are many tax advantages to homeownership. The largest tax deductions most homeowners will have annually is mortgage interest. You also get deductions from property taxes, mortgage points, and homeowners’ insurance.
Are real estate appraisals tax-deductible when obtaining a mortgage? When you obtain a mortgage, you’ll have to order a real estate appraisal. Real estate appraisals are a one time expense when buying a home that is not considered a tax-deductible item unless the house is a rental property or investment. If you are buying a rental home that is not your primary residence, real estate appraisal fees are considered a cost of doing business and deducted.