Are Title Fees Tax Deductible?

For a personal residence, title fees are not eligible for a tax deduction in the year they are paid. While an immediate deduction is not available, these fees are instead added to the property’s cost basis. This addition increases your total investment in the home, which can reduce the capital gains tax owed when the property is eventually sold.

Distinguishing Deductible vs. Capitalized Closing Costs

When you purchase a personal residence, the Internal Revenue Service (IRS) separates closing costs into two distinct categories for tax purposes. A small number of these costs can be deducted in the same tax year you buy the home. These deductible expenses primarily include prepaid mortgage interest, often called “points,” and any real estate taxes you paid on behalf of the seller at closing.

The vast majority of other settlement charges fall into the second category: capitalized costs. These are expenses the IRS considers part of the cost of acquiring the property itself. This group includes abstract fees, legal fees, recording fees, surveys, transfer taxes, and title insurance.

While the immediate deduction for points and property taxes can be claimed by itemizing on Schedule A (Form 1040), the capitalized costs serve a different, deferred purpose. They become part of your property’s basis, a figure that is central to calculating your taxable gain when you later sell the property.

The Role of Title Fees in Property Cost Basis

The “cost basis” of your home is its total cost for tax purposes, representing your complete investment in the property. This figure begins with the contract purchase price and is increased by certain settlement costs. A higher basis is advantageous because it directly reduces the amount of capital gain that may be subject to tax when you sell your home.

Title-related charges are a significant component of these includable costs. This includes the premium for the owner’s title insurance policy, fees for the title search, and any other administrative title services paid at closing. Other closing costs that also increase your basis include:

• Abstract fees
• Charges for installing utility services
• Legal fees for services related to the purchase
• Recording fees paid to state or local governments
• Survey fees

Calculating and Documenting Your Adjusted Basis

To properly calculate your home’s initial basis, you must refer to the settlement documents you received at closing. For most recent home purchases, this information is detailed on the Closing Disclosure form. For purchases that occurred before October 2015, the equivalent document is the HUD-1 Settlement Statement.

The calculation itself is straightforward: begin with the contract purchase price of the home and add all the eligible capitalized closing costs. For example, if you purchased a home for $400,000 and paid $5,000 in includable, non-deductible closing costs like title insurance and recording fees, your initial basis would be $405,000.

It is important to maintain records of your home purchase. You should keep your Closing Disclosure or HUD-1, along with receipts for any subsequent capital improvements, in a secure file. These documents are the proof required to substantiate your basis calculation when you sell the property.

Tax Treatment for Other Real Estate Scenarios

The tax rules for closing costs can change significantly depending on the type of property or transaction. The treatment for a personal home does not apply universally, and understanding these differences is important. The intended use of the property dictates whether costs are capitalized, deducted, or amortized.

Rental or Investment Property

For real estate held for investment or rental purposes, the tax treatment of closing costs is different from that for a personal residence. While many of the same costs, such as title insurance and legal fees, must still be capitalized, they become part of the property’s depreciable basis.

This allows the owner to recover the cost of the property over a period of 27.5 years for residential rental property through annual depreciation deductions. These deductions offset rental income each year, providing a more immediate tax benefit.

Refinancing a Mortgage

When you refinance a mortgage on your personal residence, the closing costs receive another distinct tax treatment. The fees paid, including title insurance and appraisal fees, cannot be deducted in the year they are paid or added to the property’s cost basis.

Instead, closing costs associated with a refinance must be amortized, or deducted in equal portions, over the life of the new loan. For example, if you paid $3,000 in closing costs on a 30-year mortgage, you would be entitled to a deduction of $100 per year.