Real Estate Tax Calc
What "added to basis" means and why it matters
The term "cost basis" refers to your tax cost in the property—the amount you are considered to have paid for it under the Internal Revenue Code. Your initial basis begins with the purchase price and is increased by costs you must capitalize rather than deduct currently. Under IRC §1012, cost is the amount paid for property, which includes the purchase price and the capitalized closing costs described in this guide.
Basis matters for two reasons. First, when you sell, your taxable gain equals the amount you receive minus your adjusted basis. Every dollar of basis you add at closing is a dollar that reduces gain—and thus reduces the tax you owe at sale. Second, for rental property, the portion of basis allocated to the depreciable building (not land) is recovered through annual depreciation deductions over 27.5 years (residential) or 39 years (commercial). Closing costs added to the building's basis are slowly recovered through those annual deductions.
Neither outcome delivers an immediate tax break in the year of closing, which surprises many buyers. But the deferred benefit is real—you are simply spreading the tax recovery over many years or receiving it as a lump reduction in gain when you eventually sell.
Immediately deductible items at closing
Despite the general capitalization rule, a small set of items on your closing disclosure are deductible in the year of closing:
Prepaid mortgage interest (per-diem interest). When you close mid-month, you typically prepay the interest that accrues from the closing date through the end of that month. Because this is genuine interest on a qualified home loan, it is deductible under IRC §163(h) as qualified residence interest in the year paid. For a primary or second home, it goes on Schedule A. For a rental, it goes on Schedule E.
Prorated property taxes. If you purchase a home and the seller has already paid property taxes that cover the period after you take ownership, you reimburse the seller for your share at closing. That reimbursement is a deductible property-tax payment for the period you own the home. It appears on Schedule A (limited by the $10,000 SALT cap) for a primary residence, or on Schedule E for a rental. If property taxes are unpaid at closing and the buyer pays them, the portion covering the buyer's ownership period is likewise deductible.
Prepaid hazard insurance. If your lender requires you to prepay a year of homeowner's insurance at closing, that amount is not deductible all at once. It is deductible as the coverage period is consumed—meaning you deduct the portion that applies to the current tax year and carry the remainder into the following year. On a primary residence, homeowner's insurance is generally not deductible at all (it is a personal expense); on a rental property, it is deductible on Schedule E as the coverage period occurs.
Items that must be capitalized into basis
The following closing-cost categories are acquisition costs that must be added to your property's cost basis under the capitalization rules:
Title insurance. Both the owner's policy and the lender's title insurance policy are capitalized into basis. There is no exception for any buyer—homeowner or investor. The amounts are added to the cost of the property, not deducted.
Attorney and closing-agent fees. Legal fees to review or prepare the purchase contract, closing agent fees, and escrow fees are all acquisition costs that are capitalized. A seller's attorney fees are treated differently (they reduce the amount realized on the sale), but for buyers they go to basis.
Transfer taxes and recording fees. Deed transfer taxes, documentary stamp taxes, and county recording fees paid by the buyer are capitalized into basis. They are not currently deductible even if you itemize deductions. (Sellers reduce their gain by these amounts as a selling expense.)
Appraisal and inspection fees paid at closing. Fees for the purchase appraisal and inspection are part of the cost of acquiring the property and are added to basis.
Survey fees. A boundary or title survey required as part of the purchase is capitalized.
Loan origination fees on a rental property. Origination points on a rental property purchase are not deducted up front. They are amortized as a financing cost over the life of the loan (reported on Form 4562, Part VI). On a primary residence, qualifying points may be deductible in the year paid under the rules of IRS Publication 936—this is an important distinction discussed in the next section.
Different rules for rental vs. primary residence
The capitalization rules apply to both primary-home buyers and rental-property buyers. However, the recovery of those capitalized costs differs substantially.
For a primary residence, the capitalized closing costs sit in basis and reduce your gain at sale. Because a primary residence is not rented or used in a trade or business, there is no annual depreciation deduction to recover those costs over time. You simply carry a higher basis and pay less tax—or exclude more gain—when you sell. The Section 121 exclusion ($250,000 single / $500,000 married filing jointly) means many primary-home sellers owe no tax at all, in which case the basis-added closing costs provide their benefit by keeping the gain below the exclusion threshold.
For a rental property, the closing costs allocated to the building (not land) are part of the depreciable basis. Because you depreciate the building over 27.5 years (residential) or 39 years (nonresidential), those closing costs are slowly recovered as annual deductions on Schedule E. The land-allocated share of closing costs—determined by the same ratio as the purchase price—is never depreciated; it stays in basis until sale.
One practical difference: on a rental, you must separate land and building costs right at acquisition using either the county assessor's land-to-improvement ratio or a purchase appraisal. Closing costs cannot be selectively stacked onto the building to inflate depreciation; they follow the same allocation ratio as the purchase price.
Points on a home purchase—the special IRC §461 rule
Mortgage points—fees paid to the lender expressed as a percentage of the loan amount to reduce the interest rate—get special treatment for primary-residence purchases. Under IRC §461(g)(2) and the guidance in IRS Publication 936, points paid on a loan used to buy or improve your main home may be deducted in full in the year paid if the following conditions are met:
- The loan is secured by your main home.
- Paying points is an established business practice in your area.
- The points do not exceed the points generally charged in that area.
- The points are computed as a percentage of the principal amount of the mortgage.
- The points are clearly designated as points on the settlement statement.
- The cash you pay at closing—through down payment, earnest money, or other funds—is at least as large as the points charged.
If all conditions are satisfied, you can deduct the full amount in the year of purchase. If any condition is not met, the points must be deducted ratably over the life of the loan.
Critically, this special rule applies only to points on a loan to buy or improve your main home. It does not apply to: points on a rental property purchase, points paid on a refinance (even of a primary residence), or points on a second or vacation home. Points in those scenarios are amortized over the loan term using Form 4562.
Worked example: $350,000 home with $8,500 closing costs
Suppose you buy a single-family primary residence for $350,000 and your closing disclosure shows $8,500 in buyer-side costs. Here is how each item is categorized for tax purposes:
Loan origination points — $2,100 (0.6% of a $350,000 loan). If you are buying your primary residence and the points meet the Publication 936 tests, these are deductible in full in year one on Schedule A. If you cannot confirm all the tests are met, amortize them over 30 years (about $70/year).
Owner's title insurance — $1,200. Added to basis. Not deductible.
Lender's title insurance — $400. Added to basis. Not deductible.
Attorney/closing agent fees — $950. Added to basis. Not deductible.
Transfer and recording taxes — $700. Added to basis. Not deductible.
Appraisal and inspection — $550. Added to basis. Not deductible.
Property-tax proration — $1,100. Your share of this year's property taxes for the days you own the home. Deductible on Schedule A (subject to the $10,000 SALT cap) in the year paid.
Prepaid per-diem mortgage interest — $500. Interest for the days remaining in the closing month. Deductible on Schedule A as qualified residence interest in the year paid.
Summary: Of the $8,500, the deductible-in-year-one total is approximately $1,600 (property-tax proration + per-diem interest), plus potentially $2,100 in points if the Publication 936 tests are met—for a best-case year-one deduction of about $3,700. The remaining $3,800 in title, legal, transfer, and inspection costs is added to your $350,000 cost basis, raising your adjusted basis to $353,800. When you sell, that higher basis reduces your taxable gain by $3,800.
What changes when you sell
When you eventually sell the property, all of those capitalized closing costs pay off. The adjusted basis calculation for the sale works like this: start with the original purchase price, add all capitalized closing costs from acquisition, add any capital improvements made during ownership, and subtract any depreciation taken (for rental property) to arrive at the adjusted basis. Taxable gain equals the selling price minus selling expenses minus adjusted basis.
On a primary residence, a higher adjusted basis can mean the difference between a gain that falls within the Section 121 exclusion and one that exceeds it—saving thousands in capital-gains tax. On a rental, the depreciable closing-cost basis is subject to the Section 1250 unrecaptured depreciation rule at a maximum 25% rate when you sell, but you already received the benefit of those deductions over the hold period.
For sellers, the closing costs they pay—commissions, transfer taxes, attorney fees—are selling expenses that reduce the amount realized. If you sold a home for $500,000 and paid $30,000 in selling costs, your amount realized is $470,000. That reduced amount is then compared to your adjusted basis to compute gain. The mechanics are the mirror image of the buyer's basis treatment.
Common mistakes to avoid
Deducting title insurance in year one. Title insurance is never immediately deductible for buyers—it is always capitalized. This is the single most common closing-cost error on individual tax returns.
Forgetting to allocate land vs. building on a rental. When you buy a rental, the IRS expects you to allocate closing costs (and the purchase price) between non-depreciable land and depreciable improvements. Using 100% of the purchase price as the depreciable basis—without subtracting land value—is incorrect and will be questioned on audit.
Deducting points on a rental in year one. The Section 461(g)(2) immediate-deduction rule is strictly limited to your main home. Points on a rental property purchase must be amortized, period.
Losing the closing disclosure. The closing disclosure (or older HUD-1) is the foundational document for basis. Because you may not sell for 20 or 30 years, losing this document can make it impossible to substantiate basis additions. Scan and store it permanently in cloud backup, tagged by property address.
Forgetting unamortized loan costs at payoff. If you pay off a rental mortgage early—through refinancing or sale—any remaining unamortized origination fees or points are fully deductible in the payoff year. Many investors overlook this deduction.
Frequently asked questions
Can I deduct title insurance on a house?
No. Title insurance premiums—both the owner's policy and the lender's policy—are capitalized into your cost basis. They are not deductible in the year you pay them. On a rental property, that basis enters your 27.5-year depreciation schedule, so you recover the cost slowly.
Are transfer taxes deductible on a home purchase?
No. Transfer taxes paid by the buyer are capitalized into cost basis and are not immediately deductible. They do reduce your taxable gain when you eventually sell the property. For sellers, transfer taxes are a selling expense that reduces the amount realized on the sale.
Are points deductible when buying a primary residence?
Points paid to obtain a mortgage on a primary residence may be fully deductible in the year paid if they meet the tests in IRS Publication 936: the loan is secured by your main home, paying points is an established practice in your area, and the points are calculated as a percentage of the loan principal, among other requirements. Points on a rental purchase or on a refinance are not deductible up front—they are amortized over the loan term.
What happens to my capitalized closing costs when I sell?
Capitalized closing costs increase your adjusted basis in the property. A higher basis reduces your taxable gain when you sell. On a primary residence, a higher basis can also expand the benefit of the Section 121 exclusion (up to $250,000 for singles, $500,000 for married couples filing jointly), because the exclusion applies to gain—and a higher basis means less gain.
Are closing costs deductible on a second home?
A second home follows the same capitalization rules as a primary residence—most closing costs are added to basis, not deducted. Mortgage interest on a second home may be deductible on Schedule A, subject to the overall $750,000 mortgage-debt limit (for loans originated after December 15, 2017). State and local property taxes are deductible subject to the $10,000 SALT cap.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.