Costs that add to your basis
The largest category at closing is costs that become part of your tax basis in the property, depreciable over the same 27.5-year (or 39-year) schedule as the building. These include: title insurance, attorney and closing fees, recording and transfer taxes paid by the buyer, survey fees, and inspection costs incurred in connection with the acquisition.
Adding these costs to basis rather than expensing them means the deduction comes slowly over decades — but you don't lose them. They also reduce your taxable gain when you eventually sell.
Costs deducted in the current year
A few closing items are deductible in the year of acquisition for a rental property. Mortgage interest paid at closing (prepaid interest for the partial month of closing) is deductible in the year paid. Property taxes prorated to the buyer at closing are deductible in that tax year.
Points (loan origination fees) on a rental mortgage are not deductible all at once — they must be amortized over the life of the loan as prepaid interest. This differs from the primary residence rule, where points are often currently deductible.
Costs that are neither deductible nor added to basis
Some closing costs simply disappear from a tax perspective: utility deposits, hazard insurance premiums (deductible as an operating expense in future years, not at closing), homeowners association dues for the first month, and in some cases, amounts attributable to the buyer's personal-use portion of a mixed-use property.
On the seller's side: costs like commissions, title fees, and attorney fees paid by the seller reduce the amount realized on the sale — they lower the sale price for tax purposes, reducing capital gain. They do not go on the seller's depreciation schedule. A thorough closing statement review with your CPA in the year of purchase or sale prevents missed deductions and missed basis additions.
Frequently asked questions
Can I deduct title insurance on a rental purchase?
Not currently — title insurance is added to your tax basis in the property and depreciated over 27.5 years.
Are buyer's closing costs deductible?
Most go to basis, not to a current deduction. Mortgage interest and prorated property taxes are the main current deductions. Points must be amortized over the loan term.
Do seller's closing costs reduce capital gains?
Yes. Commissions, title fees, and attorney fees paid by the seller reduce the amount realized on the sale, directly lowering the taxable gain.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.