Which closing costs on an apartment building purchase are deductible, and which add to basis?
Most costs of buying the building, such as title insurance, transfer taxes, recording fees, surveys and legal fees, are added to its basis and recovered through depreciation. Costs of getting the loan, such as points, the lender's appraisal and the credit report, are spread over the life of the loan. Only a few lines are deducted in the year of purchase, mainly insurance and the property tax you reimburse the seller for your days of ownership.
Four places a closing statement line can go
A closing statement for an apartment building can run to fifty lines. For tax purposes each one lands in one of four places, and sorting them early is most of the work.
| Bucket | What goes there | When it reduces your tax |
|---|---|---|
| Basis of the property | Costs of buying the building itself | A little each year through depreciation, and when you sell |
| Loan costs | Costs of getting the mortgage | Over the term of the loan |
| Deductible now | Operating costs that happen to be paid at closing | The year of purchase |
| Balance sheet only | Escrow deposits, deposits you take over, rent credits | Not a deduction; they are money held or owed |
The last bucket, including transferred security deposits and the rent proration, is covered in setting up your books after buying a building. This post is about the first three.
Costs that add to basis
Publication 551 says your basis includes the settlement fees and closing costs for buying property, defined as costs you would pay even if you bought for cash. It lists:
- Abstract of title fees.
- Charges for installing utility services.
- Legal fees, including title search and preparing the sales contract and deed.
- Recording fees.
- Surveys.
- Transfer taxes.
- Owner's title insurance.
- 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.
The tax code backs up the transfer tax line: 26 U.S.C. 164(a) treats a tax paid in connection with acquiring property as part of its cost. Basis is then split between land, which is never depreciated, and the building, which for residential rentals is depreciated over 27.5 years.
Costs of the loan
Publication 551 is just as clear that you cannot include the costs of getting a loan in the basis of the property. Its examples 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. For business property, it says these are capitalized as costs of getting the loan and deducted over the period of the loan. Points get the same treatment.
Publication 527 adds one wrinkle for rentals. Mortgage commissions, abstract fees and recording fees you pay to obtain the mortgage cannot be deducted as interest, and it calls them capital expenses that are part of your basis in the property. So a recording fee for the deed of trust goes with basis, while points, the lender's appraisal and the credit report go with the loan. Keep the loan costs in their own account so the yearly amortization is easy to figure, and if you refinance or pay off the loan early, ask your preparer about the part not yet deducted.
What you can deduct in the year you buy
Publication 551 lists items you cannot put in basis and then says that for business property the first three are deductible as business expenses: casualty insurance premiums, rent for occupying the property before closing, and charges for utilities or services related to occupying it before closing. For a rental building the usual one is the first year's property and liability premium. Publication 527 adds that a premium paid for more than one year in advance is deducted one year at a time.
Property tax needs care because of the proration. Section 164(d) treats the part of the year's tax up to the day before the sale as the seller's and the part from the sale date on as yours. Publication 551 turns that into two rules:
- If you reimburse the seller for taxes the seller already paid that cover your days of ownership, you usually deduct that amount in the year of purchase. It is not basis.
- If you pay taxes the seller owed and the seller does not reimburse you, those taxes are part of your basis. You cannot deduct them.
A worked settlement statement
Example a made-up buyer pays $3,000,000 for a 20 unit building with a $2,100,000 ten year loan. Basis lines: owner's title insurance $9,800, transfer tax $15,000, recording $420, survey $3,200 and purchase legal fees $6,500, a total of $34,920, so basis is $3,034,920. Loan lines: a 1% origination fee of $21,000, the lender's appraisal $4,500 and a credit report $80, a total of $25,580, deducted at $2,558 a year over ten years. Deductible now: a one year insurance premium of $14,400, and $9,000 reimbursed to the seller for property taxes covering the buyer's three months of a half year the seller had prepaid for $18,000. Balance sheet only: a $12,000 tax escrow deposit, recorded as an asset.
If an assessor's ratio puts 25% of the value in the land, the land is $758,730 and the building $2,276,190, which is about $82,771 of depreciation for a full year at 27.5 years. Your preparer chooses the split and the first year's partial amount.
Where DoorKeeping fits
Each property's LLC keeps its own ledger in DoorKeeping, so the closing statement goes in once, with basis items, loan costs, deductible items and escrow in separate accounts and the statement stored with the property's documents. Expense accounts map to Schedule E lines, so the insurance and the reimbursed tax land on lines 9 and 16 of that building's column. DoorKeeping prepares the numbers and does not give tax advice. It costs $2 per unit per month, with no other fees for owners or tenants.
Sources
- IRS, Publication 551, Basis of Assets, read Oct 30, 2026
- IRS, Publication 527, Residential Rental Property, read Oct 30, 2026
- 26 U.S.C. 164, Taxes (Cornell LII), read Oct 30, 2026
Questions
- Are title insurance and transfer taxes deductible on a rental purchase?
- No, not in the year you buy. Owner's title insurance and transfer taxes are part of the property's basis and are recovered through depreciation, per IRS Publications 527 and 551.
- How do I deduct loan points on a rental building?
- Spread them over the life of the loan. Publication 551 says points and other costs of getting a loan on business property are capitalized and deducted over the period of the loan.
- Is the property tax credit to the seller at closing deductible?
- Usually yes, when you reimburse the seller for taxes the seller prepaid for your days of ownership. Taxes the seller owed that you paid without reimbursement go into basis instead.