HUD-1 Settlement Statement Tax Deductions: Interest, Points, and Taxes

Tax deductions from a HUD-1 settlement statement come from only three line items: prepaid mortgage interest, qualifying mortgage points, and the prorated share of real estate taxes covering your ownership period. Everything else on the statement either gets added to your property’s tax basis for use when you sell, or it provides no tax benefit at all. The tax treatment is identical whether your closing was documented on the older HUD-1 form or the Closing Disclosure that replaced it for most residential transactions.

One threshold matters before any of these deductions helps you: they only reduce your tax bill if you itemize. The standard deduction for 2026 is $16,100 for single filers and $32,200 for married couples filing jointly.¹ If your total itemized deductions fall below that number, the closing costs discussed below won’t change what you owe.

The Three Buckets IRS Uses

The IRS sorts every closing cost into one of three categories. The first is costs deductible in the year of closing, claimed on Schedule A. The second is costs capitalized into your property’s basis, which reduces your taxable gain when you eventually sell. The third is costs that do nothing for your taxes in either direction.

The difference between a current deduction and a basis addition is timing, not whether you get value. A deduction saves you money this year. A basis increase saves you money the year you sell. And a fair number of line items save you nothing.

Prepaid Mortgage Interest

Your settlement statement will show a per diem interest charge covering the days between closing and the end of that month. That amount is fully deductible in the closing year if you itemize, and your lender will report it on the Form 1098 you receive after year-end.²

The mortgage interest deduction covers interest on up to $750,000 of mortgage debt, or $375,000 if married filing separately, for loans taken out after December 15, 2017. Older mortgages fall under the previous $1 million limit. The One Big Beautiful Bill Act made the $750,000 threshold permanent, so it no longer has a scheduled expiration.³

Mortgage Points

Points are upfront interest charges, usually calculated as a percentage of the loan amount. One point on a $300,000 mortgage is $3,000. The default rule requires you to spread points over the life of the loan, but a major exception lets you deduct them in full in the year of closing on a principal residence purchase.

To take the full deduction, you must meet every one of these conditions:

You report income and expenses on the cash method, which nearly all individual taxpayers do.
The loan is secured by your main home and used to buy or build it.
Charging points is an established business practice in your area, and the amount charged doesn’t exceed what’s typical.
The points are calculated as a percentage of the loan principal and clearly shown on your closing documents.
The funds you brought to closing (down payment, earnest money, escrow deposits) equal or exceed the points charged. Points can’t be paid out of borrowed loan proceeds.
The points weren’t substituted for fees normally itemized separately, like appraisal or title charges.

Meet every test and the full amount goes on Schedule A for the year of closing.³

Points Paid on a Refinance

Refinance points don’t qualify for the full upfront deduction. They’re spread evenly across the loan term.⁴ Two points on a 30-year refinance would be deducted at one-three-hundred-sixtieth per month. If you refinance again or pay the loan off early, any unamortized balance from the earlier points becomes deductible in that year.

Points Paid by the Seller

When a seller pays points on your behalf as a concession, you can still deduct them (assuming you meet the tests above), but you must also reduce your home’s cost basis by the same amount. You’re effectively trading a future basis benefit for a deduction this year.⁵

Prorated Real Estate Taxes

Property taxes on the settlement statement are split between buyer and seller based on the closing date. You deduct only the portion covering the days you owned the property, regardless of who physically wrote the check to the taxing authority.⁶

Property taxes fall under the state and local tax cap. For 2026, the SALT limit is $40,400, or $20,200 for married filing separately, a significant increase from the previous $10,000 cap. High earners face a phaseout: if adjusted gross income exceeds $505,000, the deduction is reduced by 30 cents for every dollar above that threshold, though it cannot drop below $10,000.⁶ The cap covers your combined property taxes, state income taxes, and local taxes, so a large property tax bill at closing can consume most of the room on its own.

Mortgage Insurance Premiums Are Not Deductible

Mortgage insurance premiums on FHA loans (MIP) and conventional loans (PMI) were once deductible as qualified residence interest. That provision expired and has not been renewed. You cannot deduct mortgage insurance premiums for 2025 or 2026.³ The upfront MIP charge on an FHA loan will appear on your settlement statement, but it gives you no current-year tax benefit.

Costs That Get Added to Your Basis

Most remaining line items on the settlement statement get capitalized into your property’s cost basis. They won’t save anything at closing, but they reduce your taxable gain when you sell. The IRS treats them as part of what it cost you to acquire the property. Costs added to basis include:

Owner’s title insurance premium (the lender’s policy is a loan cost, not a property cost).
Attorney fees for the title search, deed preparation, and closing document review.
Recording fees charged by the county to record the deed and mortgage.
Survey fees, when obtained as part of the purchase rather than solely for the lender.
Transfer taxes paid by the buyer.
Back taxes, delinquent assessments, or other seller debts you agree to assume at closing.⁵

Keep the settlement statement and every closing document. A higher basis means a smaller taxable gain years from now, and the IRS won’t reconstruct those numbers for you.

Costs That Give You Nothing

A third category is easy to miss: charges that are neither deductible nor added to basis. IRS Publication 530 identifies several of them:

Homeowner’s insurance premiums prepaid at closing, including fire and hazard coverage.
Homeowners association and condominium association dues, because they’re imposed by a private entity rather than a government.
Loan-related charges tied to obtaining the mortgage rather than acquiring the property, including the lender’s appraisal fee, credit report fees, and loan assumption fees.
Rent paid if you moved in before closing, and utility charges for the period before the transaction closed.⁷

The lender’s appraisal fee is the one that surprises people most. It feels like a property acquisition cost, but the IRS treats it as a cost of getting the loan. If you paid separately for an appraisal unrelated to the lender’s requirements, that cost would typically be added to basis.

Rental and Investment Property Rules Differ

If the property is a rental or investment rather than your residence, the treatment shifts. Mortgage interest and property taxes are still deductible, but they go on Schedule E as rental expenses rather than Schedule A. That means they reduce rental income directly and aren’t subject to the SALT cap or the standard deduction threshold.⁸

Costs that a homeowner would capitalize into basis are still capitalized on a rental, but you recover that basis through annual depreciation deductions over the property’s useful life (27.5 years for residential rental property). The benefit arrives yearly instead of waiting for a sale.⁹ Points paid on a rental property loan cannot be deducted in full at closing, even if they’d qualify on a primary residence. They’re amortized over the loan term.⁴

If You Were the Seller

Sellers rarely get itemized deductions from closing costs. Most selling expenses instead reduce the taxable gain reported on Form 8949 and Schedule D: sale price minus adjusted basis minus selling expenses equals your gain.¹⁰ Real estate commissions, transfer taxes, deed stamps, and similar seller-side fees all reduce the gain rather than appearing on Schedule A.

The one itemized deduction available to a seller at closing is the prorated share of property taxes covering the ownership period through the closing date, claimed on Schedule A subject to the same SALT cap.⁶ Sellers of a primary residence can also exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if they owned and lived in the home for at least two of the five years before the sale.¹¹ When the exclusion covers your entire gain, selling expenses stop mattering for tax purposes.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
4
Internal Revenue Service. Topic No. 504, Home Mortgage Points
5
Internal Revenue Service. Publication 551, Basis of Assets
6
Office of the Law Revision Counsel. 26 USC 164 – Taxes
7
Internal Revenue Service. Publication 530, Tax Information for Homeowners
8
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
9
Internal Revenue Service. Rental Expenses
10
Internal Revenue Service. Instructions for Form 8949 (2025)
11
Internal Revenue Service. Publication 523 (2025), Selling Your Home