Which Closing Costs Get Added to Rental Basis?

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Purchase-related closing costs such as title insurance, recording fees, transfer taxes, surveys and legal fees are added to basis and depreciated (building share only). Loan costs such as points, origination fees and lender appraisals are amortized over the loan. Prorated taxes and per-diem interest are generally deductible, and escrow deposits are neither.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage and the IRS pays for the roof over 27.5 years. The $4,812.37 of fees on page 2 of your closing disclosure? The IRS pays for some of those over 27.5 years, some over 30 years, some right away, and some never. Welcome to the most tedious page in real estate.

IRS Publication 551 draws the key line: your basis includes the settlement fees and closing costs for buying property, but not the fees and costs for getting a loan. A fee for buying property is one you would pay even if you paid cash. That test sorts most items. This guide walks through each bucket and ends with a full worked example from a closing disclosure (the modern form; older deals used a HUD-1 settlement statement).

CPA Warning Label: Your closing disclosure is a tax document wearing a real estate costume. File it with the depreciation schedule and keep it until years after you sell.

Basis-adding costs

Pub. 551 lists settlement fees and closing costs you can include in the basis of the property, including:

• Abstract fees (abstract of title fees).
• Charges for installing utility services.
• Legal fees, including title search and preparation of the sales contract and deed.
• Recording fees.
• Surveys.
• Transfer taxes.
• Owner's title insurance.
• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Other common acquisition costs that generally get capitalized: buyer's agent fees you pay, inspection fees connected to the purchase, and settlement or escrow agent fees for the purchase.

Because the land is not depreciable, these costs are split between land and building in the same ratio as the purchase price (see land vs. building allocation). Only the building share gets depreciated over 27.5 years.

Loan costs amortized over the loan

Pub. 551 lists charges connected with getting a loan that are not part of basis: points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, the cost of a credit report, and fees for an appraisal required by a lender. Fees for refinancing are also loan costs.

For business or rental property, Pub. 551 says these loan costs must be capitalized as costs of getting a loan and deducted over the period of the loan. On a 30-year mortgage, that is 1/30th a year. If the loan is paid off early through a sale or a refinance with a different lender, the remaining unamortized amount is generally deductible in that year. A refinance with the same lender can require continuing to amortize the old costs over the new loan.

Where it goes: the annual amortization is usually reported on Schedule E line 19 (other), labeled "amortization."

Mortgage insurance on a rental loan follows the same loan-cost treatment at purchase; ongoing monthly mortgage insurance premiums after closing are generally deducted as a rental expense when paid.

Prorated taxes and interest

Real estate taxes. Taxes are typically prorated at closing. The tax for the part of the year before the sale date belongs to the seller; the part from the sale date belongs to the buyer.

• If you, the buyer, pay taxes that the seller owed (for the period before closing), Pub. 551 treats them as part of your cost; add them to basis.
• If the seller paid taxes for a period after closing and you reimburse the seller at closing, that reimbursement is your real estate tax, deductible on Schedule E (rental share).
• Taxes deposited into escrow for future bills are not deductible until the lender actually pays the taxing authority.

Prepaid interest. Per-diem interest from the closing date to the end of the month is interest on your rental loan, deductible on Schedule E line 12 or 13 in the year paid. Points are the exception (amortized).

Escrow deposits for future insurance and taxes are your money sitting in an account. They are deducted when the bills are paid from escrow, not when deposited.

Costs you deduct now

For rental property, Pub. 551 says three items that are not part of basis are deductible as business expenses:

1. Casualty (hazard) insurance premiums, deducted over the period they cover.
2. Rent for occupancy of the property before closing (if you moved in or rented early).
3. Charges for utilities or other services related to occupancy before closing.

Prorated real estate taxes for your period and per-diem interest, discussed above, are also current deductions. So are HOA dues prorated for your ownership period, which you would have paid anyway.

Not deductible at all: earnest money (it is part of the purchase price), seller credits you receive (they reduce your basis, generally), and repair credits (they reduce price, so they reduce basis).

Worked HUD-1/CD example

Illustration: A landlord buys a single-family rental on May 15, 2026 for $350,000 with a $262,500 30-year loan. Assumed land/building ratio from the assessor: 25% land, 75% building. Selected closing disclosure lines:

Results:

• Basis-adding costs: $1,400 + $800 + $150 + $1,750 + $450 + $500 = $5,050. Total basis: $355,050. Building (75%): $266,288. Land: $88,762.
• Loan costs: $2,625 + $600 + $50 + $900 = $4,175, amortized at about $139 a year ($4,175 / 30), with a partial first year.
• Current deductions for 2026: $700 interest, $480 taxes, and the portion of the $1,800 insurance covering 2026 (about $1,725 for roughly 11.5 months).

Building depreciation for May (Table A-6, 2.273%): $266,288 x 2.273% = about $6,053 in 2026.

Refinancing a rental later

Refinance closing costs are all loan costs under Pub. 551 (fees for refinancing a mortgage), so none of them are added to the property's basis. They are amortized over the new loan's term.

Illustration: Five years after purchase, the landlord refinances the rental with a different lender, paying $3,600 of new loan costs on a new 30-year loan. Unamortized costs from the original loan are $4,175 minus about 5 x $139, or roughly $3,480.

• Year of refinance: deduct the remaining $3,480 from the old loan (it ended), plus the first partial year of amortization on the new $3,600.
• Following years: about $120 a year ($3,600 / 30) on the new loan.

A cash-out refinance adds one more question: what the extra cash was used for. Interest is allocated by use of the proceeds, so interest on cash pulled out to buy a car is personal interest, not a rental expense, even though the rental secures the loan. Interest on cash used to buy another rental or improve this one is deductible against that rental.

Points and fees on a refinance of your main home follow different rules on Schedule A. Do not mix them with rental amortization.

Seller credits, repairs and other wrinkles

• Seller credits for closing costs generally reduce your basis; they are a price reduction, not income.
• Repair credits negotiated after inspection reduce price (and basis). Spending the money on repairs creates its own deductions or capital costs.
• Buyer-paid seller commissions (rare) are added to basis per Pub. 551.
• Cash purchases skip the loan-cost bucket entirely, which is a simple way to test the rule: would you pay this if you paid cash? If yes, it is basis.
• Converted homes use the lesser of adjusted basis or fair market value at conversion; original closing costs are already in adjusted basis.
• Records: keep the closing disclosure for as long as you own the property and several years after the return reporting the sale.