What Closing Costs Can Be Added to Basis?
Learn which closing costs can be added to your property's basis to optimize tax benefits and gain a clearer understanding of your investment.
When buying a property, closing costs add up quickly. Some of these expenses increase your property’s cost basis, which is important for calculating capital gains when you sell. Knowing which costs qualify can help reduce future tax liability.
Certain fees related to acquiring the property may be added to its basis, while others cannot. Understanding this distinction ensures accurate record-keeping and better financial planning.
Title, Legal, and Survey Fees
Several expenses related to verifying ownership and ensuring a clear title can be included in the property’s cost basis. Title fees cover the cost of a title search and title insurance. A title search confirms the seller has the legal right to transfer ownership and that no outstanding claims or liens exist. Title insurance protects against future disputes over ownership, such as clerical errors, undisclosed heirs, or fraudulent claims. These costs are directly tied to acquiring the property and can be added to the basis.
Legal fees associated with the purchase are also includable. These may cover drafting and reviewing contracts, conducting due diligence, and ensuring compliance with local property laws. If an attorney handles the closing process, their fees can be capitalized as part of the acquisition cost. However, legal expenses related to financing, such as reviewing loan documents or negotiating mortgage terms, cannot be added to the basis.
Survey fees, which determine the exact boundaries of the property and identify any encroachments or easements, are another includable expense. Lenders often require a survey before approving a mortgage, but even when not mandatory, it provides valuable information for the buyer. Since a survey establishes the physical parameters of the asset being acquired, its cost is part of the purchase price.
Transfer and Stamp Taxes
Government-imposed taxes must be paid to legally transfer ownership. Transfer taxes, levied by state, county, or municipal authorities, are based on the property’s sale price or fair market value. The rate varies by location, with some states charging a flat percentage and others using a tiered structure. In New York City, for example, the Real Property Transfer Tax (RPTT) applies at rates ranging from 1% to 3.025%, depending on the transaction value. These taxes are directly tied to the acquisition and can be included in the property’s cost basis.
Stamp taxes, also known as documentary or deed stamps, serve a similar purpose but are typically calculated per $100 or $500 of the purchase price. Florida, for instance, imposes a documentary stamp tax of $0.70 per $100 of consideration, with Miami-Dade County applying a slightly different rate structure. These charges are mandatory for recording the deed and finalizing the transfer, making them an unavoidable part of the transaction. Because they are necessary to establish ownership, they are capitalized as part of the property’s cost.
Recording and Abstract Fees
When a property changes hands, local governments require official documentation to reflect the new ownership. Recording fees cover the cost of filing the deed with the appropriate county or municipal office, ensuring the legal transfer is publicly recognized. These fees vary by jurisdiction, with some counties charging a flat rate and others basing the cost on the number of pages recorded or the property’s value. Since filing the deed is required to acquire legal ownership, recording fees can be added to the property’s basis.
Abstract fees pertain to the historical records of a property’s title. An abstract of title compiles a summary of all recorded transactions, including past sales, liens, and encumbrances. This document helps verify a clear chain of ownership and identifies any legal issues that could affect the buyer’s rights. The process of compiling an abstract involves reviewing public records, and the associated costs can be included in the purchase price for tax purposes.
Costs That Cannot Be Added to Basis
Some expenses incurred during a property purchase may feel like part of the acquisition cost but cannot be included in the basis. One common category is financing-related costs, such as loan origination fees and mortgage points. These charges, often expressed as a percentage of the loan amount, compensate lenders for processing the loan and reducing the interest rate. While they impact the overall cost of buying a property, the IRS treats them as deductible interest expenses rather than capital expenditures. Similarly, appraisal fees, which lenders require to verify the property’s value before approving a mortgage, are not considered part of the purchase price since they serve the lender’s interests rather than securing ownership rights.
Homeowners insurance premiums and prepaid property taxes paid at closing are also excluded. Insurance protects against potential future losses rather than contributing to the acquisition itself, making it an ongoing expense rather than a capital investment. Prepaid property taxes are typically prorated between the buyer and seller based on the closing date, ensuring each party pays their fair share for the year. Since these payments cover recurring obligations rather than increasing the property’s value, they do not qualify for basis adjustments.