An escrow account is an account established by your mortgage lender to pay your property taxes and certain insurance premiums. Rather than paying these bills on an annual basis, an escrow account lumps the fees into your monthly mortgage payment. Escrow accounts are mandatory for certain Federal Housing Administration mortgages, while other homeowners can voluntarily choose to establish an escrow account with their lender. Although escrow fees aren't a deductible expense, the payments made from an escrow account can be.
Deductions for Homeowners
Technically, escrow fees can't be deducted on a tax return. However, a portion of the payments made from your escrow account are deductible. The IRS allows homeowners to deduct the following expenses as itemized deductions:
- Loan origination fees
- Points purchased
- Mortgage interest expense
- Mortgage insurance premiums
- Real estate taxes
This means that any amounts paid from your escrow account for real estate taxes are deductible but amounts used for homeowner's insurance are not deductible.
Your lender will send you a Form 1098 during the beginning of the year that details the deductible interest expense, points and mortgage insurance premiums that you paid. For real estate taxes, reference the annual statement sent by your county tax assessor. Deduct these expenses on Schedule A, lines 6, 10 and 13.
Deductions for Landlords
The rules for deducting escrow fees on a rental property are similar to the rules for other homeowners. However, instead of being limited to interest expense, points, mortgage insurance premiums and taxes, landlords can deduct all costs incurred to operate a rental property. That means that the other payments made from an escrow account -- like home insurance premiums -- may be deducted. Instead of using Schedule A, landlords should list all real estate expenses on Schedule E, lines 9, 12 and 16.
