Are Closing Costs Tax Deductible?

Most closing costs don’t produce a deduction you can point to on your return in the year you close, and that’s typically what surprises people when they sit down with their accountant and the closing disclosure doesn’t translate into a line item the way they expected.

A lot of buyers and sellers find out that the costs are still doing tax work, just in a different part of the return. Most go into basis or reduce the amount realized from a sale, and a smaller group actually produce a direct deduction in the year you paid them.

On the Buying Side

Most buyers walk away from closing without a clear picture of where their closing costs land on a tax return. I spent seven years as a certified residential appraiser starting in 2003, and it came up regularly on the buyer side.

The appraisal fee I got paid on a transaction, for instance, wasn’t something the buyer could deduct in the year they closed; it went into their cost basis in the property instead.

What Buyers Can Deduct in Year One

Two items typically come back as year-one deductions for buyers: the prepaid mortgage interest and the property taxes paid for the buyer’s portion of the closing year. Prepaid interest covers the partial month before the first regular payment and qualifies as mortgage interest under Schedule A for buyers who itemize. The specific loan conditions are in the IRS publication on home mortgage interest.

Points on the closing disclosure get more scrutiny from accountants than anything else in the deductible column. The year-one write-off only holds on primary residence purchases where the points are a percentage of the loan and labeled explicitly as points on the disclosure, and anything outside those conditions amortizes over the life of the loan instead.

I’ve had sellers bring a refi closing disclosure expecting the same year-one write-off they’d heard about from the original purchase, and that’s not how refinance points land. They amortize over the life of the loan, and the accountant spreads the deduction across the loan term rather than pulling it all into the year you closed the refi.

Property taxes paid at settlement for the buyer’s portion of the year qualify as a deduction, though the accountant is working against a $40,400 ceiling in 2026 after the One Big Beautiful Bill Act raised it from $10,000 last July. Most California buyers are already near that ceiling by the time the accountant adds in everything else in the state and local stack, leaving little of the property tax deduction left to apply.

Costs That Add to Basis

Appraisal and inspection fees go into the basis pile alongside title and settlement charges. The IRS doesn’t allow a deduction for any of those in the year the buyer closes.

Take a buyer who came in at $500,000 with $14,000 in closing costs: the accountant records a cost basis of $514,000, not the purchase price. Three years later on a $630,000 sale, the CPA calculates the taxable gain starting from $514,000, and the seller ends up owing tax on a smaller number than they would have without those basis items.

The full breakdown of how much closing costs run in California covers what typically lands on the buyer’s side of a closing disclosure, including which charges are negotiable.

On the Selling Side

Everything on the seller’s side of the closing disclosure, from the commission down to the recording fees, doesn’t produce a line item deduction on Schedule A. Most sellers expect the opposite when they sit down with their accountant.

On a $600,000 sale with $25,000 in selling costs, the accountant starts the gain calculation from $575,000, not the full sale price. By the time the capital gains question comes up, those selling costs have already been pulled out of the calculation.

On most primary residence sales, sellers don’t end up owing capital gains. The accountant applies the primary residence exclusion and the gain usually stays below it.

On the deals where that exclusion comes into play, a seller who’s met the two-year ownership and use test under IRS Topic 701 typically qualifies for a $250,000 exclusion, and on joint returns the accountant applies that against $500,000 in gain.

The sellers I’ve seen where the accountant calculates a gain past those thresholds are usually in high-value properties with a long hold period, and in those situations the accountant is working through every selling cost and basis adjustment in the closing disclosure to pull the taxable number down.

Most sellers going through a sale find the seller-side picture more complicated than they expected. The full breakdown of what it costs to sell in California covers what each of those charges typically runs.

Which Selling Costs Come Out of the Gain

I’ve had sellers come to escrow focused almost entirely on the capital gains question, and commission is usually what the accountant handles first. It comes off the top of the amount realized before the gain calculation runs, which means it’s already accounted for before the exclusion question even comes up.

The escrow fee and title insurance premium typically land on the seller’s side, and the accountant pulls both off the amount realized before figuring the gain. In most Southern California transactions those two charges together come to another $2,500 to $4,000 that reduces the base before the capital gains calculation starts.

The documentary transfer tax and recording fees are also part of what the accountant pulls from the amount realized, and the closing disclosure labels those items by their transaction description rather than their role in the gain calculation, which is why most sellers need the accountant to flag them. Home warranties and HOA transfer fees paid at close come out the same way, and on most of the settlements I’ve reviewed with sellers, those were the last charges anyone had questions about.

The prorated property taxes on the seller’s side don’t reduce the gain the way other selling costs do. From the accountant’s perspective, those taxes are debt the seller already owed through the close date, and the accountant handles them as a separate settlement item rather than folding them into the gain calculation.

The Torroba Street Deal

Torroba Street, Mission Viejo

In May 2019 we closed on a house on Torroba Street in Mission Viejo for $440,000. The seller had inherited the property and wasn’t in a position to take on what a traditional listing would have required, between the physical prep and coordinating the process from a distance over several months.

After we rehabbed and sold the property, the commission and selling-side costs on our end all reduced what we realized from the transaction before the capital gains calculation ran, and on a fix-and-flip that had been an inherited purchase, the basis calculation involved a few layers that don’t come up on a standard owner-occupied sale.

Andrea Van Soest, CA DRE #01505854, reviewed the closing disclosure with the seller during escrow, something she does on every transaction in her role as a licensed agent, and part of that conversation covered how the inherited basis affected what the seller was looking at for taxes. The step-up on an inherited property can run into six figures, and most sellers haven’t run that number before they get to escrow.

On inherited properties, sellers usually find the basis step-up matters more than anything in the closing cost column, and in most of the deals we’ve worked on, that number hadn’t come up at all before escrow. For sellers navigating an estate situation, the basis step-up on an inherited sale matters more than most closing cost line items, and it often hadn’t come up before escrow opened.

Rental and Investment Properties

Landlords who call about this are usually working through a different set of questions than primary residence sellers, and the closing cost treatment on a rental starts differently from the moment of purchase.

A landlord who has been in a property for 10 or 15 years and is thinking about selling is often surprised to find out how much depreciation has run through their returns over that time. The IRS recaptures depreciation at sale at up to 25% on the recaptured amount, a separate calculation from whatever capital gains rate applies to the rest of the gain, and one that the selling costs reduce before that calculation runs.

On a rental purchase, the basis depreciates over the property’s useful life rather than sitting unchanged until the sale, and the primary residence exclusion isn’t available, so the full gain, minus selling costs, stays on the table.

The full selling cost picture on a rental property goes deeper on how that calculation runs, including where the depreciation history matters most.

For anything that sits between a clear primary residence and a clear investment property, that classification is the first question to take to a CPA before working through any of the other numbers.

What to Bring Your CPA

Sellers and buyers who bring the closing disclosure to their accountant tend to move through that appointment faster. Every charge from the transaction is already on that document with the party who paid it and the column it landed in.

Andrea works through closing disclosures with sellers during escrow as a licensed agent, and those conversations regularly surface the same gap: line items people paid for but can’t name, charges bundled or labeled in ways that don’t obviously map to any tax category.

On the buyer side, the accountant is mostly separating the deductible interest from the basis items. The seller side runs deeper, with the amount realized and the basis from the full ownership period both needing to come together before the exclusion question resolves.

Any accountant running the numbers on a rental sale will need the depreciation history going back to the original purchase. Pull that together before scheduling the appointment rather than finding out it’s missing once you’re already there.

If You’re Thinking About Selling Now

A CPA can work through which bucket each of your closing costs falls into and what the tax picture looks like for your situation, and the specifics shift based on income and how you’ve used the property over the ownership period.

If you’re also sorting out whether selling makes sense right now, we work across Orange, Los Angeles, San Diego, San Bernardino, and Riverside counties and can typically close in about 10 days on an as-is property.

Call or text us at (951) 331-3844 or head over to get a cash offer and we’ll take a look at what you’re working with.

Doug Van Soest spent seven years as a certified residential appraiser starting in 2003 before co-founding SoCal Home Buyers with his wife Andrea Van Soest, CA DRE #01505854. Together they have closed over 400 transactions across Southern California.