I purchased a rental property last year. What closing costs can I deduct

Deductible Closing Costs for Rental Property

When purchasing a rental property, certain closing costs are deductible on your tax return. According to the information provided by the Internal Revenue Service (IRS), here are the deductible closing costs for a rental property purchased in the previous tax year:

Deductible Closing Costs

1. Interest: Mortgage interest paid at the time of purchase can be deducted.

2. Certain Mortgage Points: Points paid to obtain a mortgage for the rental property may be deductible.

3. Real Estate Taxes: Certain real estate taxes paid at closing are deductible.

Closing Costs Added to Basis

Many other settlement fees and closing costs are not immediately deductible but are added to the basis of the property. These costs include:

- Abstract fees

- Charges for installing utility services

- Legal fees

- Recording fees

- Transfer taxes

- Title insurance

- Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, sales commissions, and charges for improvements or repairs.

Depreciation Deduction

The costs that are added to the basis of the property are part of your depreciation deduction. Depreciation is a method to deduct the costs of buying and improving a rental property, spread out over the property's useful life as determined by the IRS.

Mortgage Insurance Premiums

- Mortgage insurance premiums are generally deductible in the year paid.

- If you prepay premiums for more than one year in advance, you can only deduct the portion of the premium payment that applies to that year.

- The deduction for mortgage insurance premiums is reported on line 9 of Schedule E (Form 1040), Supplemental Income and Loss.

Non-Deductible Closing Costs

Certain closing costs are not deductible, such as:

- Charges for services

- Assessments for local benefits

- Transfer taxes (or stamp taxes)

- Homeowners’ association assessments

- Foreign taxes paid on real estate

Additional Resources

For more detailed information on rental property expenses, including which closing costs are deductible, you can refer to the following IRS publications:

- [Rental expenses | Internal Revenue Service]

- [Publication 527 (2023), Residential Rental Property]

- [Publication 530 (2023), Tax Information for Homeowners]

- [Publication 551 (12/2022), Basis of Assets]

It is important to keep accurate records of all expenses related to the purchase and improvement of your rental property to ensure proper reporting and deduction on your tax return.

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Sources:

Rental expenses | Internal Revenue Service 2024-07-30

Publication 530 (2023), Tax Information for Homeowners 2024-08-02

Sale or trade of business, depreciation, rentals - Internal Revenue Service 2024-07-31

Publication 551 (12/2022), Basis of Assets | Internal Revenue Service 2024-07-30

Publication 527 (2023), Residential Rental Property 2024-08-04

Basis of Assets - Internal Revenue Service 2024-07-31

Your Home Page 1 of 25 12:30 - 7-Feb-2024 - Internal Revenue Service 2024-07-30

Publication 523 (2023), Selling Your Home - Internal Revenue Service 2024-08-04

2023 Publication 530 - Internal Revenue Service 2024-08-03