When you buy a house, the taxes you pay at closing usually include a state or local transfer tax, a mortgage recording tax in about ten states, your share of the year’s property taxes, an escrow deposit that funds future property tax bills, and small recording fees. After closing, several of those payments — mortgage interest, points, and property taxes — can reduce your federal income tax bill if you itemize.
Real Estate Transfer Taxes
Roughly three dozen states charge a transfer tax when property changes hands, and many cities and counties add their own on top. The rate is tied to the sale price, either as a flat percentage or as a set dollar amount per increment of value (for example, $2 for every $500). Some jurisdictions layer a higher “mansion tax” rate on homes above a set price threshold.
Who pays depends on local custom and what your purchase contract says. In many areas the seller pays by default; in others the buyer covers part or all of it. On a $400,000 home in an area with a 0.5% rate, the transfer tax comes to $2,000.
Exemptions are common. Transfers between spouses, especially in a divorce, are often exempt. Government agencies are typically exempt. Some places waive or reduce the tax for first-time buyers. Your title company or closing attorney can confirm what applies, and the final figure appears on your Closing Disclosure under “Taxes and Other Government Fees.”1Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
Mortgage Recording Taxes
About ten states charge a separate tax when your mortgage or deed of trust is recorded with the county. This one is calculated on the amount you borrow rather than the sale price, so a larger down payment reduces it.
Rates generally run from about 0.2% to 2% of the loan amount, depending on the state and sometimes the county. A $300,000 mortgage at a 0.35% rate produces a $1,050 charge at closing. If this tax applies in your area, it will show up on your Loan Estimate.
Your Share of the Year’s Property Taxes
Property taxes run on an annual or semi-annual cycle, and closings rarely line up with those cycles. When you buy partway through a tax period, you and the seller split the year’s bill based on how many days each of you owns the home. That split, called a proration, is a line item on the Closing Disclosure.1Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
The direction of the adjustment depends on whether local taxes are paid in advance or in arrears. If the seller paid the full year up front, you reimburse them for the portion after you take ownership. If the taxes haven’t yet been paid for the months the seller lived there, they give you a credit at closing to cover their share. On a $4,000 annual tax bill with a mid-year closing, the adjustment is roughly $2,000 in one direction or the other.
Property Tax Escrow Deposit
If you’re financing the purchase, your lender will almost certainly require you to fund an escrow account at closing. That account holds money to pay future property tax bills, and usually homeowners insurance, as they come due. The upfront deposit depends on the timing between your closing date and the next tax bill.
Federal law caps the deposit. Under the Real Estate Settlement Procedures Act, the initial escrow can cover the taxes and insurance that come due between closing and your first regular payment, plus a cushion of no more than one-sixth of the estimated annual charges.2Office of the Law Revision Counsel. 12 USC 2609 – Limitation on Requirement of Advance Deposits in Escrow Accounts That cushion works out to about two months’ worth. If your monthly tax obligation is $300, expect an initial deposit of roughly $600 to $1,200.
The escrow money isn’t a tax. It’s your money, held in trust to pay bills on your behalf, but it still increases the cash you need at the closing table. Your Closing Disclosure itemizes it under “Initial Escrow Payment at Closing.”
FIRPTA Withholding When the Seller Is Foreign
If the seller is a foreign national or foreign entity, federal law makes you, the buyer, responsible for withholding part of the sale price and sending it to the IRS. The Foreign Investment in Real Property Tax Act (FIRPTA) sets this rule, and if you fail to comply, you are personally liable for the tax the seller owed, plus penalties and interest.3Internal Revenue Service. Exceptions From FIRPTA Withholding
The general rate is 15% of the total sale price.4Internal Revenue Service. FIRPTA Withholding A reduced 10% rate applies when you are buying the property to live in and the price is $1,000,000 or less. No withholding is required at all if the price is $300,000 or less, you or a family member plan to live there at least 50% of the days it’s occupied during each of the first two years, and you are buying it as a residence.5Office of the Law Revision Counsel. 26 USC 1445 – Withholding of Tax on Dispositions of United States Real Property Interests
In most residential deals, the seller signs a certification stating they are not a foreign person, which ends the buyer’s obligation. You cannot rely on that certification if you have reason to believe it’s false. A closing agent or real estate attorney handles the mechanics, but the legal liability stays with you as the buyer.
Property Tax Reassessment After You Buy
Your property tax bill can change substantially after closing. Many jurisdictions reassess a home’s taxable value when ownership changes, often using the purchase price as the new benchmark. If the previous owner bought the home years ago at a lower price, the assessed value and the annual bill can jump once the sale is recorded.
Practices vary. Some states reassess every property upon sale; others only reassess during countywide revaluations or after new construction. Where reassessment on sale happens, a supplemental tax bill may arrive several months after closing, covering the gap between the old and new assessed values for the rest of the tax year. That bill comes separately from your regular property tax and is easy to miss, so watch your mail during the first year.
Ask your agent or the local assessor’s office before closing how reassessment works in your area. Knowing whether your taxes will rise, and by how much, lets you budget for the first year with confidence.
Recording Fees and Other Government Charges
Local governments also charge fees to record the deed, mortgage, and other documents that make your purchase official. Recording fees are set by county or parish and typically range from about $15 per page to a flat $50 or more per document. They’re small next to transfer taxes, but they add up. The Closing Disclosure lists them under “Taxes and Other Government Fees” alongside any transfer tax.1Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions
Which Closing Costs Can You Deduct
Some closing-related payments can lower your federal income tax bill the following year, but only if you itemize instead of taking the standard deduction. For the 2026 tax year, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Itemizing only pays off when your combined deductions clear that number. For many new homeowners, mortgage interest, property taxes, and points do the trick.
Mortgage Interest
You can deduct interest on up to $750,000 of mortgage debt used to buy, build, or substantially improve your primary or second home ($375,000 if married filing separately).7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The prepaid or interim interest listed on your Closing Disclosure, covering the days between closing and the end of the month, counts toward the deduction for that year.
Mortgage Points
Points, sometimes called origination fees or discount points, are upfront charges figured as a percentage of your loan amount. If you buy points to lower your rate on your primary residence, you can usually deduct the full amount in the year you paid them, provided paying points is standard practice in your area, you supplied enough of your own funds at closing to cover them, and the charge is clearly shown on your settlement statement.8Internal Revenue Service. Topic No. 504, Home Mortgage Points Points on a second home or a refinance are generally spread out over the life of the loan.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Property Taxes
The property taxes you pay, including amounts collected through prorations and escrow at closing, are deductible as part of the state and local tax (SALT) deduction. For 2026, the SALT deduction is capped at $40,400 ($20,200 if married filing separately) and begins to phase down once modified adjusted gross income exceeds $505,000. That cap covers your property taxes plus either state income taxes or state sales taxes combined, so a large property tax bill can eat much of the room.
Where to See the Numbers Before You Sign
Two documents give you a clear look at every tax-related charge before closing. Your Loan Estimate, delivered within three business days of applying for a mortgage, provides preliminary figures for transfer taxes, recording fees, property tax prorations, and escrow deposits. Your Closing Disclosure, provided at least three business days before closing, shows the final numbers.1Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions Compare the two side by side. If a charge has jumped, ask your lender or closing agent to explain it before you sign.