Closing Costs: Miscellaneous Expense or Cost Basis?

[Juan Alcorta]

Hi everyone, 

I recently closed on my first rental property and I'm curious about how to track closing costs correctly. Do they apply as "miscellaneous" expense (which I can deduct when I file the taxes of the current year) or add them to the cost basis (which will reduce your taxable capital gain when you sell the house).

Here is a concrete example with some made up numbers from closing day:

- Purchase Price: $300,000

- County taxes from 11/01/2023 to 01/01/2024: $850

- HOA Prorations: $30

- Appraisal Fee: $400

- Prepaid Interest from 11/03/23 to 12/01/23: $1,100

- 3 months of homeowners insurance (for escrow account): $150

- 4 months of property taxes (for escrow account): $2000

- Underwriting Fee: $600

- Wire Fee: $15

- TITLE & ESCROW CHARGES: ...

- Government Charges: ...

- 1 year of Homeowners insurance:..

- Home warranty: ..

How to track all of these? Except for everything that goes to the escrow account (and will be used later to pay taxes/insurance), does the rest go into cost basis? Or some of these count as expenses for the year 2023?

Thanks in advance!

[Michael Plaks]

@Juan Alcorta

There's no easy way to answer, as it is complicated.

County taxes and HOA - deductible, assuming that the property is already placed in service, i.e. either has a tenant or is ready for one.

Anything in escrow - not deductible until paid out of escrow.

Appraisal and underwriting fee - "loan fees" which is amortized (evenly deducted, month-by-month) over the life of the loan

Title fees and government fees - added to basis for slow depreciation.

No, I do not have a complete list.