Which closing costs add to your basis?

The general test

The basis of property you buy is usually its cost, and for real property the cost includes certain fees. Publication 551 sets one clear test: a fee for buying property is a cost that must be paid even if you bought the property for cash, and those fees can be included. A fee that exists only because you borrowed money to buy cannot. Once you apply that test to each line on your closing statement, the rest follows.

Costs the publication says to include

The publication lists these settlement fees and closing costs as part of basis: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including title search and preparation of the sales contract and deed), recording fees, surveys, transfer taxes, owner's title insurance, and any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. In general, your cost also includes items such as sales tax, freight, installation and testing, excise taxes, legal and accounting fees that must be capitalized, revenue stamps, recording fees and real estate taxes assumed for the seller.

Costs the publication says to leave out

You cannot include casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy before closing, and charges connected with getting a loan. The loan examples it lists are points (discount points and loan origination fees), mortgage insurance premiums, loan assumption fees, the cost of a credit report and fees for an appraisal required by a lender. Fees for refinancing a mortgage are also excluded. Amounts you place in escrow for future payment of taxes and insurance are not settlement costs either; they are advance payments, not part of the purchase.

If the property is for business use, the publication says the occupancy-related items are deductible as business expenses and the loan costs must be capitalized as costs of getting a loan and deducted over the period of the loan. Points on a loan are generally deducted over the loan term and are not added to basis. Special rules may apply to points on a mortgage for your main home, which can be deducted in full in the year paid if certain requirements are met; the publication points to Publication 936.

Real estate taxes and seller-paid points

If you pay real estate taxes the seller owed and the seller did not reimburse you, treat those taxes as part of your basis, and you cannot deduct them as taxes. If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount in the year of purchase and you do not add it to basis. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. The publication also says to reduce the basis of your home by any seller-paid points, which is why the calculator has a box for them.

Assuming a mortgage

If you buy property and assume, or buy subject to, an existing mortgage, your basis includes the amount you pay plus the amount to be paid on the mortgage. The publication's example: buying a building for $20,000 cash and assuming an $80,000 mortgage gives a basis of $100,000. To reproduce it, enter 100,000 as the price, which already includes the assumed mortgage, and leave the other boxes empty.

Building rather than buying

If you build property or have it built, construction expenses are part of basis. The publication lists land, labor and materials, architect's fees, building permit charges, payments to contractors, payments for rental equipment and inspection fees. It cautions that you must not include the value of your own labor, or any other labor you did not pay for.

Why it is worth the effort

Every dollar you correctly add to basis reduces the gain when you sell, and the amount you attribute to the building is the base for depreciation if the property is a rental. Go through the closing statement once, mark each line as buying cost, loan cost, prepaid or proration, and keep the final statement with your tax records. Prorations of taxes and rents between buyer and seller need care because they follow the rules above rather than a single answer.

Sources

• IRS Publication 551, Basis of Assets (12/2025): Cost Basis, Real Property (Real estate taxes, Settlement costs, Points, Assumption of mortgage), Constructing assets. Read November 2, 2026.

Edition read: Publication 551 (12/2025). This page summarizes the publication and does not replace it.