Taxes for buyers · IRS Publication 527Buying a rental property: which closing costs go into your basis

When an investor buys a rental property, many settlement costs are not deducted in the year of purchase – they become part of the property's basis, which is then depreciated (IRS Publication 527, for 2025 returns). Part of the basis: abstract fees, charges for installing utility services, legal fees, recording fees, surveys, transfer taxes, title insurance, and any amounts the seller owes that the buyer agrees to pay – back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Real estate taxes the seller owed that the buyer pays without reimbursement are added to basis, not deducted; if the buyer instead reimburses the seller for taxes the seller paid for the buyer's period, the buyer can usually deduct them. Not part of basis: fire insurance premiums, rent or other charges for occupancy before closing, loan costs such as points, origination fees, assumption fees, credit reports and a lender-required appraisal, and amounts put in escrow for future taxes and insurance. Assuming the seller's mortgage adds the remaining balance to basis. Because land is not depreciated, the cost must be split between land and building by fair market value – or, if those aren't known, by the property tax assessment: in the IRS example, a $200,000 purchase assessed 85% house and 15% land gives a $170,000 building basis.