Investment Property Q&A: Are closing costs tax deductible?

Range Certified Financial Planner
Range Certified Financial Planner
March 15, 2024

Investment Property Q&A: Are my closing costs tax deductible?

Many of our members already have, or are exploring investing in income generating properties. As you get started in this, one common question is, "Are the closing costs on an income property tax-deductible?" The straightforward answer is no, but there are a few things to consider, tax-wise. The down-payment itself might not get you a tax break, but owning an income property opens up a plethora of other tax benefits that can sweeten the deal, even from the start.

Your downpayment isn’t tax deductible, but portions of it can be.

First off, while the initial down payment isn't deductible, some of the costs associated with obtaining a your mortgage can be. These include things like:

  • Mortgage Interest (but not your principle payment).
  • Property Taxes, the portion of the year’s income taxes you pay post-purchase can be deducted.
  • Some Closing Costs, such as the amount paid for discount points.

While these costs don’t come close to offering the same value as being able to write off the entire down payment, they’re still available to you.

Don’t forget about depreciation.

Over time depreciation of your rental property will help you out, tax-wise. The IRS allows property owners to deduct a portion of the property's cost (excluding land) over a set period. This can significantly reduce your taxable income, making the lack of a down payment deduction a bit easier to swallow.

Depreciation is calculated against the cost basis of the property - the initial value of the property, minus the value of the land. You can roll some of your closing costs into this initial value, thus driving up the cost basis. These include:

  • Abstract fees
  • Utility installation service charges
  • Legal fees
  • Recording fees
  • Surveys
  • Transfer taxes
  • Title insurance

The IRS assumes a rental property depreciates by the same amount, yearly, over a 27.5 year period. So if the original cost basis of your rental home is $150,000, and closing costs of $5,000 are rolled into that, your yearly deduction goes from $5,454.54 to $5,636.36. While it won’t get you a deduction on day one, over the course of time, it adds up.

In Conclusion

The bottom line? While the down payment isn't deductible, the ongoing benefits of owning an income property can be substantial. Before jumping in, it's crucial to crunch the numbers, understand the tax implications, and consult with a tax professional to navigate the complexities and ensure you're making the most of your investment. As you’re evaluating an income property as an investment, reach out to Range for help understanding what’s possible.

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