Can Closing Costs Be Added to Property Basis?

Buying property comes with a whirlwind of expenses, and closing costs often take center stage. But when it comes to taxes, you might be wondering: Can closing costs be added to property basis? The answer is yes—some closing costs can be included in your property’s basis, which impacts future tax calculations, such as when you sell the property. In this article, we’ll break down what closing costs can (and cannot) be added to your property basis, how to calculate the adjusted basis, and how this knowledge can save you money in the long run.

What Is Property Basis, and Why Does It Matter?

Property basis, also known as your cost basis, is the starting point for determining capital gains or losses when you sell your property. It includes the original purchase price of the property and certain costs associated with acquiring it. A higher basis can reduce your taxable gain when you sell, which is why understanding what can be added to your property basis is so important.

Which Closing Costs Can Be Added to Property Basis?

Not all closing costs can be added to your property’s basis. The IRS allows you to include specific costs directly tied to acquiring the property. Here are some common closing costs you can add:

1. Title Fees: Costs related to title insurance and title search can be included.
2. Survey Fees: If you pay for a property survey, this expense can be added to your basis.
3. Recording Fees: Fees for recording the property deed with your local government are eligible.
4. Transfer Taxes: State or local transfer taxes paid at closing are part of your property’s basis.
5. Attorney Fees: Legal fees related to the property’s purchase (not financing) can be added.
6. Abstract Fees: Costs for examining property records or abstracts are includable.

Which Closing Costs Cannot Be Added to Property Basis?

Some closing costs are considered personal expenses or are tied to the financing of the property, which means they cannot be added to your basis. These include:

1. Loan Origination Fees: These are financing costs and are not part of your property’s basis.
2. Points Paid on a Loan: Points are deductible as interest but can’t be added to the basis.
3. Homeowner’s Insurance Premiums: These are not related to acquiring the property.
4. Property Taxes: Taxes paid at closing are deductible but not includable in the basis.
5. Appraisal Fees: Appraisals for financing purposes can’t be added to the basis.

How to Calculate the Adjusted Basis?

Your adjusted basis is your original basis plus any additions or improvements made to the property. Here’s how to calculate it:

1. Start with the Purchase Price: Include the amount you paid for the property.
2. Add Eligible Closing Costs: Include all IRS-approved costs listed above.
3. Include Improvements: Add the cost of capital improvements, such as renovations or adding a new roof.
4. Subtract Depreciation (if applicable): If you’ve used the property for rental purposes, account for depreciation.

For example:
If you purchased a property for $300,000 and had $5,000 in eligible closing costs, your initial basis would be $305,000. If you later made $10,000 in improvements, your adjusted basis would be $315,000.

Why Adding to Your Basis Matters

Including closing costs in your property basis benefits you by lowering your capital gains tax when you sell the property. For example, if you sell the property for $400,000 and your adjusted basis is $315,000, your taxable gain would only be $85,000 ($400,000 – $315,000), rather than $100,000 if you didn’t include eligible closing costs.

Tips for Tracking and Documenting Closing Costs

1. Keep Detailed Records: Save all closing statements, receipts, and invoices for eligible expenses.
2. Separate Financing Costs: Make sure to distinguish between acquisition costs and financing costs.
3. Consult a Tax Professional: If you’re unsure about which costs can be included, seek advice to ensure accuracy.

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