The IRS allows you to deduct certain expenses involved in owning a home, including some closing costs associated with the purchase or refinance of a home. The rules that govern what you may claim as deductions are contained in IRS Publication 530. You may still need to consult with your tax planning professional or accountant to make sure that you are doing the right thing.
Study the rules. The rules as contained in IRS Publication 530 (find a link in the Resources section) specify what you can and cannot deduct. Closing costs usually include everything from points to mortgage interest, mortgage insurance, property taxes and appraisal fees, not all of which are deductible. The IRS, for example, allows you to deduct points but not appraisal fees.
Get proper documentation of closing costs. The details of a real estate transaction are documented on a HUD1 form, also known as the settlement statement. Make sure you keep this document as it contains proof of all your expenses involved in the purchase of the property.
When you file your taxes, opt to itemize, but make sure this will give you the largest income deduction. Using a tax filing software is the best way to do it because if you do not get the most refund by itemizing it advises you to take the standard deduction. Also, if you use a tax filing software, all you need to do is answer the questions -- at the end it prints out all the relevant IRS forms. Note that if you do not itemize, you will take the standardized deduction instead -- but you cannot claim closing cost deductions in addition to the standard deduction.
If you file manually, you will need form Schedule A in addition to IRS form 1040. Different portions of the form are used for different deductions. For example, real estate taxes go on line 6; points could go on line 10 or 12; mortgage interest on line 10 or 11; and mortgage insurance on line 13.
File your tax return and make sure to keep all copies of relevant documents for at least three years in case you get audited.
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