Real Estate Tax Calc
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.
Loan costs are their own separate bucket
One of the most common mistakes is lumping loan-related costs into the property's basis. They belong in a fourth bucket of their own. Costs you pay to get the mortgage — loan origination fees and points, the lender's required appraisal, credit-report fees, underwriting and processing fees, and mortgage recording taxes — are capitalized as loan costs and amortized (deducted ratably) over the life of the loan, not added to the building basis and not deducted all at once.
The distinction matters because loan costs and property basis are recovered on completely different schedules: a 30-year mortgage amortizes loan costs over 360 months, while building basis depreciates over 27.5 years. If you pay off or refinance the loan early, you generally deduct the remaining unamortized loan costs in the year the old loan is retired. Keep the loan costs on their own line in your records so this cleanup deduction isn't lost.
A line-by-line worked example
Say you buy a rental for $400,000 with a $300,000 mortgage and your closing disclosure shows: title insurance $2,200, attorney and closing fees $1,800, recording and transfer taxes $3,000, survey $600, lender's appraisal $700, loan origination points $3,000, prepaid interest $900, and prorated property taxes $1,500.
Here is where each dollar goes. Added to basis (recovered over 27.5 years after the land allocation): title insurance, attorney/closing fees, recording and transfer taxes, and survey — $7,600 total. Amortized over the loan term: the $700 appraisal and $3,000 points — $3,700 as loan costs. Deducted this year: $900 prepaid interest and $1,500 prorated property taxes — $2,400. Nothing is simply lost here, but the timing ranges from immediate to decades, which is exactly why the closing statement deserves a careful pass.
Seller-side costs in detail
When you sell a rental, most transaction costs are selling expenses that reduce your amount realized — effectively lowering the sale price used to compute gain. These include the real estate commission (often the largest line), transfer taxes and documentary stamps paid by the seller, the seller's share of title and escrow fees, attorney fees for the sale, and advertising or staging costs directly tied to the sale.
Because these reduce the gain rather than being deducted separately, a $500,000 sale with $35,000 of selling costs is treated as a $465,000 amount realized. That $35,000 reduction lowers both your capital gain and — where the gain is large enough — the slice taxed as unrecaptured Section 1250 gain and the 3.8% net investment income tax. Distinguish these one-time selling costs from fix-up work done to ready the property: repairs are ordinary Schedule E deductions in the year incurred, while capital improvements made before sale are added to basis.
Points on a rental: why they are amortized, not deducted
On a primary residence, points paid to obtain the mortgage are often fully deductible in the year of purchase. On a rental, that shortcut does not apply. Points on a rental (or on a refinance of any property) are prepaid interest that must be deducted ratably over the term of the loan. On a $3,600 points charge for a 30-year loan, you deduct roughly $120 per year.
The silver lining is the early-payoff rule: if you sell the property or refinance with a different lender before the loan is fully paid, you generally deduct all remaining unamortized points in that year. If you refinance with the same lender, the remaining points from the old loan are typically added to the points on the new loan and amortized over the new term. Track points separately so you capture the catch-up deduction when the loan ends.
The land allocation applies to capitalized closing costs
Because land is never depreciable, the closing costs you add to basis must be split between land and building along with the purchase price itself. If your purchase price allocates 20% to land and 80% to the building, then 20% of your capitalized title, recording, and survey costs sits in the non-depreciable land basis and only 80% is recovered through depreciation.
A defensible allocation usually starts with the county assessor's land-to-total ratio applied to your total basis, or a qualified appraisal. This same allocation carries through everything: the building portion of your closing costs is depreciated, while the land portion waits in basis until you sell, where it still reduces your gain. Getting the split right at purchase keeps your annual depreciation accurate and your recapture correct at sale.
Closing costs on a refinance
A refinance has its own rules, and they differ from a purchase. Because you are not acquiring the property, the closing costs on a refi generally do not add to the property's basis. Instead, the points and loan fees on the new loan are amortized over the term of the new loan as a loan cost. Third-party charges that are truly for the loan — the lender's appraisal, credit report, and underwriting — are treated the same way.
Two wrinkles matter. First, if you paid off an old loan whose points you were still amortizing, you generally deduct the remaining unamortized points from the old loan in the year of the refinance (unless you refinanced with the same lender, in which case they roll into the new loan's amortization). Second, if you take cash out and use it to improve the property, the interest tracing and points may follow that use; cash used for personal purposes changes the deductibility of the corresponding interest. Track the purpose of refinance proceeds, because interest follows the money, not the mortgage.
Costs during construction or major rehab
If you buy and then substantially rehab a property, or build new, a different regime can apply while the work is underway. The uniform capitalization rules (UNICAP) of IRC Section 263A generally require you to capitalize costs incurred during the production period — including construction-period interest and property taxes — into the basis of the property rather than deducting them currently. These capitalized carrying costs are then recovered through depreciation once the property is placed in service.
This surprises investors who expect to deduct property taxes and loan interest immediately: during an active construction or major-improvement period, those carrying costs may have to be added to basis instead. Once the property is placed in service and available for rent, ordinary operating deductions resume and the interest and taxes become currently deductible again. The dividing line is the placed-in-service date, so document when the property became ready and available to rent.
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.
How are loan origination fees and points on a rental treated?
They are loan costs, not property basis. You capitalize them and deduct (amortize) them ratably over the term of the loan. If you sell or refinance with a new lender before the loan is paid off, you generally deduct any remaining unamortized amount in that year.
Is the lender's appraisal fee added to my basis?
No. An appraisal required by the lender is a cost of obtaining the loan, so it is amortized as a loan cost over the mortgage term rather than added to the property's depreciable basis.
Do I have to split closing costs between land and building?
Yes for the costs you add to basis. Because land is not depreciable, capitalized closing costs are allocated using the same land-to-building ratio as the purchase price. Only the building portion is depreciated; the land portion stays in basis until you sell.
Are seller closing costs deducted or subtracted from the sale price?
They are subtracted from the sale price (they reduce the amount realized), not deducted separately on Schedule E. Commissions, transfer taxes, and the seller's title and escrow fees all lower the gain you report at sale.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.