Are Closing Costs Amortized or Depreciated? Rules by Category

Whether closing costs are amortized or depreciated depends on what the cost paid for and how you use the property. Fees tied to acquiring the real estate get added to your cost basis and, if the property is a rental or business asset, recovered through depreciation over 27.5 or 39 years. Fees tied to obtaining the mortgage are amortized over the life of the loan, again only for business or investment property. A third group of charges — insurance premiums, escrow deposits, prepaid occupancy — gets neither treatment. And points follow their own rules.

The Three Buckets on a Settlement Statement

Every line on a closing disclosure falls into one of three tax categories:

Acquisition costs, which are capitalized into the property’s basis and depreciated (if eligible).
Loan acquisition costs, which are capitalized separately and amortized over the loan term (if eligible).
Non-deductible charges, which are neither capitalized nor deducted at closing.

Points sit slightly outside this framework because they represent prepaid interest, and the tax code treats interest differently from service fees. Sorting each line into the right bucket is the whole task; once a cost is classified, the treatment follows automatically.

Closing Costs That Get Depreciated

Costs of acquiring the property itself are added to your cost basis. Per IRS Publication 551, these include abstract and title search fees, legal fees for preparing the sales contract and deed, recording fees, surveys, transfer taxes, owner’s title insurance, utility installation charges, and any seller obligations you agree to pay (back taxes, unpaid interest, repair charges the seller owed).¹

These costs go into basis regardless of whether the property is a personal home, a rental, or a commercial building. The depreciation question comes next, and that answer depends on use.

Rental and Commercial Property

If the property produces income, you recover your basis — including the capitalized closing costs — through annual depreciation deductions.² Under the General Depreciation System, residential rental property has a 27.5-year recovery period; nonresidential real property (offices, warehouses, retail) uses 39 years.³ Both use straight-line depreciation, so the annual deduction stays roughly constant. A rental house with a $200,000 depreciable basis produces about $7,273 a year in depreciation ($200,000 ÷ 27.5).⁴

Land is not depreciable, so before running the calculation you have to split the total basis between land and building. Publication 551 lets you use the relative fair market values or, if you don’t have independent appraisals, the property tax assessor’s allocation.¹ Only the building portion gets depreciated.

One thing to remember: each year’s depreciation reduces your adjusted basis. When you sell, that lower basis produces a larger taxable gain. Depreciation defers tax; it doesn’t erase it.

Personal Residence

You cannot depreciate a home you live in. The capitalized closing costs still matter, though, because they raise your basis and shrink your eventual taxable gain on sale. Most sellers of a primary residence can exclude up to $250,000 of gain ($500,000 if married filing jointly) if they owned and lived in the home for two of the five years before the sale.⁵ For gains that run above the exclusion — common in high-appreciation markets — every dollar of capitalized closing costs cuts the taxable portion dollar-for-dollar. Keep the settlement statement for as long as you own the property.

Closing Costs That Get Amortized

Loan acquisition fees are handled separately and cannot be added to basis.¹ The IRS puts the following in this category:

Points (discount points, loan origination fees)
Mortgage insurance premiums
Loan assumption fees
Credit report costs
Lender-required appraisal fees
Refinancing fees

For business and investment properties, these fees are capitalized and deducted ratably over the loan’s life. Pay $3,000 in loan fees on a 30-year mortgage for a rental, and you deduct $100 a year. Origination fees typically run 0.5% to 1% of the loan, so a $300,000 mortgage generates roughly $1,500 to $3,000 that follows the amortization schedule.⁶

For a personal residence, these same fees generally produce no tax benefit at all. They’re not deductible, not amortizable, and not added to basis. Points are the notable exception.

If you pay off the loan early by selling or by refinancing with a different lender, you can deduct any unamortized balance in the payoff year. Refinance with the same lender and that write-off is not available; the remaining balance rolls into the new loan and amortizes over the new term along with any new fees.⁷

Points Have Their Own Rules

Points are prepaid interest, not a service fee, and the treatment depends on the property and the loan.

Buying a Primary Residence

On a purchase loan secured by your main home, you can deduct all the points in the year paid if you meet every one of these tests:⁷

The loan is secured by your main home.
Paying points is standard practice in your area.
The points don’t exceed what’s typically charged locally.
You use the cash method of accounting.
The points weren’t charged in place of fees ordinarily listed separately, such as appraisal or title fees.
The cash you brought to closing (down payment, earnest money, escrow deposits) was at least as much as the points, and those funds weren’t borrowed from the lender.
The loan was used to buy or build the home.
The points are calculated as a percentage of the loan and clearly shown on the settlement statement.

Pass all the tests and you can either deduct in full or spread the points over the loan. Fail any of them and you must amortize.

Investment Property and Second Homes

Points on rentals, commercial buildings, and second homes cannot be deducted in the year paid. Amortize them equally over the loan term.⁸

Refinancing

Points paid on a refinance, even on your main home, generally have to be amortized over the new loan’s term. If part of the refinance proceeds pays for substantial home improvements, the share of points tied to that improvement spending can be deducted right away; the rest amortizes.⁷

Seller-Paid Points

When the seller pays your points as part of the deal, the IRS treats them as if you paid them yourself. You can deduct seller-paid points in the year of purchase if the primary-residence tests are met, but you must reduce your basis by the same amount.⁹ Other seller obligations you assume (back taxes, unpaid interest, repair charges) work the opposite way: they increase your basis and give you no immediate deduction.¹

Closing Costs That Get Neither Treatment

Some line items on a settlement statement are neither capitalized into basis nor amortized:

Casualty and fire insurance premiums
Rent or occupancy charges for time in the property before closing
Utility charges for the pre-closing period
Escrow deposits held for future tax and insurance payments

For rental owners, insurance premiums and similar operating costs are deductible in the year paid as ordinary business expenses — not through depreciation or amortization.⁶ For personal homeowners, these charges produce no federal deduction at all. Escrow deposits are simply money held for later disbursement, so they aren’t a cost you’ve incurred yet.

One boundary worth noting: transfer taxes are often mistakenly grouped here. Transfer taxes paid by the buyer are added to basis, not written off at closing.¹

Where the Deductions Go on Your Return

Correct classification only helps if the numbers land on the right form.

Depreciation on rental property is reported on Schedule E (Form 1040), Line 18. If the property was placed in service during the current tax year, Form 4562 is also required.¹⁰
Amortization of loan fees that begins in the current year is reported on Part VI of Form 4562, Line 42. If amortization started in a prior year and you don’t otherwise need Form 4562, the deduction goes on the “Other Deductions” line of your return.¹¹
Points on a primary residence appear in Box 6 of Form 1098. If deducted in the year paid, include them with mortgage interest on Schedule A.¹²

Basis-related closing costs on a personal home never appear on an annual return. They live in your files until you sell, at which point they reduce the taxable gain.

What Happens If You Get the Classification Wrong

Deducting a capitalized fee as a current expense, or amortizing a cost that should have been added to basis, can trigger an accuracy-related penalty of 20% of the resulting underpayment. The penalty applies to underpayments caused by negligence, disregard of tax rules, or a substantial understatement of income tax.¹³ For gross valuation misstatements, the rate doubles to 40%.

The most common errors are writing off title insurance or recording fees in the year of purchase instead of adding them to basis, and amortizing loan fees on a personal residence when no deduction is available in the first place. The simplest defense is to sort every line on the closing disclosure into one of the three buckets — basis, loan, or neither — before filing.

1
Internal Revenue Service. Publication 551, Basis of Assets
2
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. Publication 946, How To Depreciate Property
5
Internal Revenue Service. Topic No. 701, Sale of Your Home
6
Internal Revenue Service. Publication 527, Residential Rental Property
7
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
8
Internal Revenue Service. href=”https://www.irs.gov/taxtopics/tc504″ target=”_blank” rel=”noopener”>Topic No. 504, Home Mortgage Points
9
Internal Revenue Service. Topic No. 504, Home Mortgage Points
10
Internal Revenue Service. Instructions for Schedule E (Form 1040)
11
Internal Revenue Service. Instructions for Form 4562
12
Internal Revenue Service. Instructions for Form 1098
13
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments