What Closing Costs Tax Deductible For Rental Properties?

As a real estate investor, you know that the Internal Revenue Code is friendly to property owners. But there’s no reason to pay more in tax than you need to.

Closing costs are one of the unavoidable expenses when purchasing or refinancing investment properties. But come tax time, real estate investors need to know: Are closing costs tax-deductible?

The short answer is yes, but they are deducted in different ways. Some costs, such as mortgage interest, mortgage points, and real estate property taxes, can be deducted in the year they are incurred. Other costs, like title insurance, recording fees, and legal fees, must be added to the property’s basis and deducted over time through depreciation. Properly categorizing these expenses can help maximize tax savings for real estate investors.

In this guide, we’ll walk you through how closing costs work for rental properties and offer actionable tips to help you reduce or even eliminate the tax burden on your rental income.

What Are Closing Costs?

Closing costs on a rental property are the fees and expenses you pay at the end of a real estate transaction beyond the down payment. Generally ranging between 2% and 5% of your loan amount, these costs are similar to those incurred when purchasing an owner-occupied home. 

Note: Some title companies offer discounts for real estate investors, which means your fees may be lower than what the average homeowner pays.

Common Types of Closing Costs

When purchasing or refinancing a rental property, you can expect to encounter expenses such as:

• Inspection Fees: Costs for property appraisals, home inspections, termite and pest inspections, and (in some cases) surveys or septic inspections for rural properties.
• Professional Fees: Payments to attorneys or financial advisors who help draft and review closing documents.
• Mortgage Fees: These include loan application charges, credit report fees, origination fees, and underwriting fees.
• Prepaid and Impound Amounts: Advance payments for property taxes, mortgage interest, homeowners insurance, and even HOA fees.
• Title Company Fees: Charges for escrow services, recording fees, transfer taxes, and title searches.‍
• Mortgage Insurance Premiums (MIP): For investors making a down payment of less than 20% on certain FHA or VA loans, mortgage insurance premiums might be required.

Which Closing Costs on Rental Property Are Deductible?

When it comes to your taxes, most closing costs on a rental property are accounted for in one of two ways.

1. Expenses You Can Deduct in the Year the Property Is Purchased
2. Costs That Must Be Added to the Property’s Cost Basis and Depreciated Over Time

Let’s break down these categories.

1. Closing Costs You Can Deduct in the Year Paid

According to the IRS, there are three types of closing costs that you may be able to deduct in full during the year of purchase if you itemize your deductions:

Mortgage Interest Paid at Closing

As a rental property investor, you can deduct the interest portion of your mortgage payment but not the principal repayment.  This is because the principal payment reduces your outstanding loan balance rather than serving as an operating expense. 

When you pay mortgage interest at closing (for example, prepaid interest covering the period between closing and the first mortgage payment due date), you can deduct that interest in the current tax year. Each year, your lender will provide you with a Form 1098 that details the interest paid.

Mortgage Points (or Discount Points)

A mortgage point (sometimes called an origination point) is a fee paid to the lender in exchange for a lower interest rate. Each point typically equals about 1% of the loan amount. These fees cover services such as borrower verification, document preparation and review, and credit checks. 

For tax purposes, a portion of the points you pay may be deductible in the year they are incurred (if you meet IRS criteria), while the remaining portion must be amortized over the life of the loan. Your Form 1098 should detail how much can be expensed immediately versus how much must be spread out.

Prepaid Real Estate Taxes

When you close on a rental property, you may be responsible for paying property taxes for the remaining portion of the year. Even if the seller has prepaid the taxes, a prorated share will be adjusted on your settlement statement. This prorated amount is deductible in the year you take possession of the property.

2. Closing Costs That Increase Your Basis

Not all closing costs are immediately deductible. Some expenses need to be added to your property’s cost basis, which is then used to calculate depreciation and, eventually, your capital gains when you sell.

What Is Cost Basis?

Your cost basis is essentially the total amount you’ve invested in the property. It starts with the purchase price and is increased by expenses that add value or prolong the life of the property, such as certain closing costs. A higher cost basis results in lower taxable gains when you sell.

Which Closing Costs Increase Your Basis?

Expenses that are considered improvements or that add long-term value are not deducted in the year they are incurred. Instead, they are added to your cost basis and depreciated over time. These typically include:

• Abstract Fees: Costs for obtaining a historical record of the property’s ownership and legal documents.
• Utility Installation Charges: Fees for setting up essential services like water, electricity, or gas.
• Legal Fees: Expenses for legal services related to the purchase.
• Recording Fees: Fees charged by government agencies to record the new deed.
• Surveys: Costs to determine property boundaries.
• Transfer Taxes: State or local taxes imposed on the transfer of property.
• Title Insurance: While the lender’s title insurance is not deductible, the owner’s policy can be added to your basis.
• Seller-Paid Items: Certain costs the seller owes like back property taxes or sales commissions that you agree to pay.

Depreciation and Why Basis Matters

Depreciation is a non-cash expense that allows you to recover the cost of the property (minus the value of the land, which does not depreciate) over time. For residential rental properties, the IRS allows depreciation over 27.5 years. The larger your cost basis (after adding eligible closing costs), the greater your annual depreciation deduction will be, which in turn lowers your taxable rental income.

Related: What Is Accelerated Depreciation & Depreciation Tax Benefits?

Example Calculation:

Imagine you purchased a rental property for $160,000, and you incurred closing costs that must be added to the basis. If the value of the land is $15,000, then the depreciable basis is:

• Total Basis: $160,000
• Minus Land Value: $15,000
• Depreciable Amount: $145,000

Dividing $145,000 by 27.5 years yields an annual depreciation expense of approximately $5,273. If your rental property generates $4,000 in net income (after operating expenses), this depreciation expense could eliminate your taxable income for that year—potentially even resulting in a net operating loss.

Tracking Your Deductible Closing Costs

Accurate rental property bookkeeping is essential for any real estate investor. Keeping track of all your closing costs not only ensures you take full advantage of your deductions but also helps you maintain an accurate cost basis for depreciation purposes. Here are some strategies to help you manage this process effectively:

Review Your Settlement Documents

Your settlement statement (often a HUD-1 or Closing Disclosure) lists every fee and expense incurred at closing. Go through these documents carefully and identify which items are:

• Immediately deductible expenses (e.g., mortgage interest, certain mortgage points, and prepaid property taxes).
• Required to be amortized over the life of the loan.
• To be added to your cost basis for future depreciation and capital gains calculations.

Use a Detailed Spreadsheet or Accounting Software

Creating a spreadsheet or using dedicated rental property accounting software helps you categorize your expenses. Record each item, note whether it’s deductible in full, amortized, or added to your cost basis, and update this as you incur additional costs (such as during refinancing).

Leverage Landlord Studio for Expense Tracking

For real estate investors, efficiency is key. Landlord Studio is an all-in-one property management solution designed to simplify expense tracking and reporting. With Landlord Studio, you can:

• Income Expense Tracking: With default expense categories in line with IRS requirements and features like bank feeds, you can have complete confidence in your income and expense tracking.
• Generate Comprehensive Reports: Easily produce financial reports, including Schedule E report, to capture all your deductible expenses.
• Maintain an Up-to-Date Cost Basis: As new improvements or additional closing costs arise, Landlord Studio makes it simple to track your property’s current cost basis.
• Streamlined Tax Preparation: With organized records and automated reporting, you’ll spend less time on paperwork and more time growing your portfolio.

Using Landlord Studio not only saves you time and reduces errors, ensuring every deductible expense is accounted for, maximizing your tax benefits year after year.

Top Tax Deductions for Rental Property Landlords

Closing costs and depreciation are just two of the many tax deductions available to rental property investors. Here’s a look at some other key tax deductions that can help you reduce your taxable income:

Repairs and Maintenance

Repairs and maintenance that keep your property in good operating condition are fully deductible in the year incurred. This includes:

• Landscaping and general maintenance
• Plumbing or roof repairs
• HVAC servicing and seasonal maintenance

Because these expenses are considered ordinary and necessary to maintain your rental property, they offer a significant opportunity to reduce taxable income without having to wait for depreciation.

Professional Service Fees

Fees paid for property management, leasing, accounting, legal services, financial planning, and even online tenant screening are fully deductible. These professional services are essential to the efficient operation of your rental property business and can add up to substantial tax savings.

Mortgage Interest

While the principal portion of your mortgage payment reduces your loan balance and isn’t deductible, the interest expense is fully deductible. Every year, your lender provides a Form 1098, which itemizes the mortgage interest you’ve paid—an important figure for calculating your deductions.

Travel Expenses

If you travel to your rental property for management purposes, the associated travel costs may be deductible. For local trips, you can deduct auto expenses either by using actual costs or the IRS standard mileage rate. Out-of-town travel is generally deductible, provided that the primary purpose of the trip is related to your rental business.

Insurance Premiums

Insurance is a critical expense for any property investor. Premiums paid for homeowners' or landlord insurance, which cover risks such as fire, theft, and flood, are fully deductible. Additionally, any extra coverage for landlord liability insurance is also deductible—often bundled with your mortgage payment.

Depreciation

Depreciation is perhaps one of the most powerful tax deductions available to rental property investors. This non-cash expense allows you to recover the cost of your investment (excluding land) over time. For residential properties, the IRS permits a depreciation period of 27.5 years. By maximizing your depreciable basis (through adding qualifying closing costs), you can significantly lower your taxable rental income.

Pass-Through Tax Deduction (Qualified Business Income Deduction)

For many investors, the Qualified Business Income (QBI) deduction—often referred to as the pass-through tax deduction—provides an additional deduction of up to 20% of qualified rental income. This deduction is taken after all other expenses, including depreciation, have been deducted. It can further reduce your taxable income and improve your overall cash flow.

Related: 15 Rental Property Tax Deductions For Landlords

Final Thoughts: Maximizing Your Tax Benefits as a Real Estate Investor

Navigating the world of closing costs and rental property expenses can be complex. However, understanding which costs you can deduct immediately, which must be amortized, and which increase your cost basis is essential for optimizing your tax strategy and maximizing your investment returns. 

By knowing the differences and keeping accurate records, you ensure that every eligible expense works to reduce your taxable income.

Create your free Landlord Studio account today to streamline your rental property management and ensure you stay on top of your rental property finances.

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What Closing Costs Are Tax Deductible?: FAQs

Q: Which rental expenses are tax deductible?‍

A: Tax-deductible rental expenses include mortgage interest, property taxes, insurance premiums, repairs, maintenance costs, professional service fees, and travel expenses related to managing your property. These expenses are reported on Schedule E of your tax return.

Q: Can I deduct expenses from the sale of a rental property?‍

A: Yes. Certain expenses incurred at closing that are not immediately deductible (such as title insurance, recording fees, and transfer taxes) can be added to your property’s cost basis. A higher cost basis reduces your taxable gain when you sell the property.

Q: What is tax deductible when closing on a house?‍

A: When closing on a rental property, you can typically deduct prepaid mortgage interest, certain mortgage points (or discount points), and prorated real estate taxes in the year the property is acquired. Other closing costs may need to be amortized or added to your cost basis.

Q: What housing expenses are tax deductible?

‍A: For rental properties, deductible expenses include mortgage interest, property taxes, certain closing costs, repairs, insurance premiums, and operating expenses. However, expenses such as homeowners insurance (if not related to a rental) or HOA fees are generally not deductible for investment properties.

Q: Can you write closing costs off on your taxes?‍

A: Some closing costs can be written off in the year they’re incurred (if you itemize deductions), while others must be recovered over time through amortization or added to your cost basis, thereby reducing future capital gains tax.

Q: What costs are tax deductible when buying a home?‍

A: For a rental property purchase, deductible costs include mortgage interest paid at closing, qualifying mortgage points, and prepaid real estate taxes. Other fees like legal fees, recording fees, and certain title expenses, are typically added to your property’s cost basis.

Q: Are final expenses tax deductible?‍

A: Final expenses—such as recording fees, transfer taxes, or certain appraisal fees—are generally not immediately deductible. Instead, they are added to your property’s cost basis, reducing taxable gains when you sell the property.

Q: What are abstract and recording fees?

A: Property documents including deeds, mortgages, litigations, tax sales, and so on are included in the Abstract. It also includes a list of all the people that owned the property, and when they owned it. Recording Fees are for the filing of the Deed and your mortgage within your County.