If the Seller Pays Closing Costs, Are These Tax-Deductible?

Buyer Closing Costs

The majority of closing costs are paid by the buyer when the house is purchased. Closing costs are an amalgam of many fees charges by escrow, title and lending companies, as well as the down payment and other major loan payments. Generally, if these are set fees connected with the transaction, such as title search and appraisal fees, they will not be deductible. Other fees, such as pre-paid interest on the mortgage, will be deductible by the buyer if they are part of closing costs.

In some circumstances, sellers will agree to pay a portion of the buyer's closing costs. Sellers do this to make it easier for buyers, especially those short on cash, to afford the house. Sellers benefit because they can reach a closing date more easily, and buyers benefit by saving some of the money they would have to pay upfront. If the seller pays something like pro-rated property taxes, these taxes are tax-deductible -- but only on behalf of the buyer.

Mortgage points can be bought to lower the interest rate on the mortgage used to purchase the property. A lower interest rate means smaller monthly payments from the buyer, especially at the start of the mortgage, and can make a large difference in financing. Sellers may agree to purchase some of these mortgage points as part of the deal, a change that will be reflected in closing costs. Again, point costs (one percentage point of the loan principal each) are deductible, but only by the buyer. Even if the seller buys them, the buyer is the only one that can deduct them.

This buyer-oriented category of deductions may seem unfair to the seller, but not the way that the IRS views the transaction. Sellers should keep in mind that all the profit they receive from the sale of the house counts as income that they will be taxed on. By covering any part of the closing costs for the buyer, the seller automatically lowers the profit on the sale, and so lowers the taxes due. This is a natural deduction buyers do not benefit from.