Are Closing Costs Tax Deductible for Rental Properties?

Just bought a rental property? You’re probably asking: which of those hefty closing costs can I actually write off? Good news—some are immediately deductible, while others boost your depreciation over time. And thanks to the  One Big Beautiful Bill Act (signed into law on July 4, 2025), rental property owners now have new ways to maximize tax savings, especially through bonus depreciation and expanded expensing.

The Two-Track System: Immediate Deductions vs. Basis Additions

The IRS splits closing costs for rental properties into two buckets: some you can deduct right away, and others get added to your property's basis—which helps you out through depreciation. Knowing the difference helps you avoid missed deductions and rookie mistakes.

Immediately Deductible Closing Costs

According to the IRS, only a few closing costs are eligible for an immediate deduction in the year you buy the property:

1. Prepaid Mortgage Interest: If you prepaid interest at closing (typically covering the period before your first mortgage payment), you can deduct that amount in full. Look for it on your Form 1098 from the lender.

2. Mortgage Points (with conditions): Discount points paid to  lower your interest rate might be partially deductible in the year paid. The rest gets spread out over the life of the loan. (Each point = 1% of your loan amount.)

3. Prorated Property Taxes: You can deduct property taxes for your ownership portion of the year—even if the seller already paid them and you reimbursed them at closing.

Closing Costs Added to Your Property's Basis

Most other closing costs aren’t immediately deductible—but don’t toss them aside. These costs get added to your property’s cost basis, which increases your annual depreciation deduction over 27.5 years. Here’s what typically gets capitalized:

• Title insurance and search fees

• Recording fees and transfer taxes

• Legal and attorney fees

• Appraisal and survey fees

• Escrow or settlement charges

• Real estate commissions (if paid by buyer)

• Inspection fees

These costs don’t lower this year’s tax bill, but they help reduce your taxable rental income every year going forward.

How the 2025 One Big Beautiful Bill Act Affects Rental Property Owners

The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, brings big tax updates for rental property investors—especially when it comes to depreciation and energy incentives.

1. Bigger, Faster Write-Offs for Property Improvements

100% Bonus Depreciation Made Permanent: As of January 19, 2025, eligible property (like appliances, flooring, or HVAC systems used in rentals) can now be fully expensed in the year placed in service—no more phaseout cliff. It’s here to stay.

Higher Section 179 Expensing Limits: The Section 179 deduction cap jumps to $2.5 million, with a new phase-out threshold at $4 million. That gives investors way more room to write off qualified improvements upfront—especially helpful for larger portfolios or big rehab projects. Remember, Section 179 generally applies to tangible personal property within your rental (like appliances) and certain qualified real property improvements, but not the building structure itself, which continues to be depreciated over 27.5 years.

2. Last Call for Energy Credits

Some clean energy incentives are riding off into the sunset:

• Residential Clean Energy Credit (e.g. solar panels, geothermal systems)

• Energy Efficient Home Improvement Credit (e.g. insulation, windows, doors)

Both credits expire after December 31, 2025. So if you’re thinking about upgrading your rental with energy-efficient features, 2025 is the year to act.

3. Individual Tax Breaks Locked In

If you qualify as a real estate professional or operate your rentals through an S corp or LLC, there’s more good news:

• The 20% Qualified Business Income (QBI) deduction is now permanent.

• The increased standard deduction also sticks around post-2025.

That means fewer surprises and more planning certainty for long-term investors.

How to Maximize Your Depreciation Deduction

The bigger your property’s cost basis, the bigger your annual depreciation write-off. That means capturing every eligible closing cost matters—because over time, it adds up to real tax savings.

Example:

• Property purchase price: $200,000

• Depreciable closing costs: $8,000

• Land value: $20,000

• Depreciable basis: $188,000 ($200,000 + $8,000 - $20,000)

• Annual depreciation: $6,836 ($188,000 ÷ 27.5 years)

That $6,836 deduction lowers your taxable rental income every single year. Depending on your other expenses, it could even wipe out your rental profit on paper—and help you avoid paying tax on cash flow you actually keep.

Common Closing Cost Categories and Their Tax Treatment

Here’s how the IRS treats typical closing costs for rental properties—what you can deduct now, what gets added to your basis, and what helps you down the road via depreciation.

Pro tip: The basis-boosting costs won’t help this year, but they increase your depreciation every year—and that’s how savvy investors lower long-term taxes.

Special Considerations for 2025

Documentation You’ll Need

Good records = smooth tax prep. Be sure to keep:

• HUD-1 Settlement Statement or Closing Disclosure

• Form 1098 (from your lender, showing mortgage interest and points)

• Receipts and invoices for services like inspections, legal fees, and title work

• Appraisal and survey reports

These documents help your tax pro correctly allocate deductible expenses, update your basis, and substantiate deductions if the IRS ever comes knocking.

SALT Deduction Gets a Temporary Boost

If you itemize deductions, the State and Local Tax (SALT) cap jumps to $40,000 for tax years 2025 through 2029. That’s a big deal for investors in high-tax states like California, New York, and New Jersey.

Heads-up: The increased cap phases down for taxpayers with over $500,000 in income—but you’ll still get at least the original $10,000 deduction.

How Town Helps Real Estate Investors Get Every Deduction They Deserve

Rental property tax rules are tricky—and most generic tax software just isn’t built for them. Town's dedicated real estate tax professionals know the landscape, from bonus depreciation to basis allocation, and we’re here to help you go beyond basic compliance.

Deep Real Estate Expertise

Town’s CPAs aren’t generalists—we specialize in rental property taxation. From depreciation schedules to passive loss rules, we know what actually matters for real estate investors. And with the tax laws changing fast (looking at you, OBBBA), we stay ahead so you don’t fall behind.

Year-Round Planning (Not Just April 15th)

We don’t vanish after tax season. Town’s advisors work with you all year long to:

• Time acquisitions for maximum depreciation

• Structure renovations to qualify for bonus write-offs

• Run cost segregation studies (especially for properties over $500K)

• Set up entities the smart way—especially if you own multiple rentals

Line-by-Line Property Reviews

We dig into every property purchase to make sure you’re claiming everything you're entitled to, including:

• Smart allocation between land and building

• Identifying appliances, flooring, and fixtures that qualify for faster depreciation

• Timing repairs vs. improvements for optimal tax treatment

• Making the most of passive activity loss rules

Learn more: How to Calculate Rental Property Depreciation

Expert CPAs + Smart Tech = Maximum Accuracy

At Town, real estate-savvy CPAs lead the charge—backed by AI that catches what others might miss. Our platform integrates with your property management software to auto-categorize expenses, while our human experts review everything with a trained eye. The result? Fewer errors, no missed deductions, and a tax return you can trust.

Action Steps for 2025 and Beyond

Whether you’ve just closed on a new rental or you're managing a growing portfolio, here’s how to make the most of the 2025 tax law changes and keep your returns optimized year-round:

Just Bought a Property?

• Round up your Closing Disclosure, Form 1098, and all service invoices

• Schedule a consultation with Town’s real estate tax specialists

• If your property is over $500,000, ask about a cost segregation study

• Plan any big purchases or improvements for Q4 2025 to capture full bonus depreciation

Managing a Portfolio?

• Set up quarterly tax planning check-ins (not just a once-a-year review)

• Track all property expenses in real time to avoid scrambling at tax time

• Stay up to date on rule changes like OBBBA’s depreciation and SALT updates

• Consider 1031 exchanges to defer gains and keep your money working

Need to brush up on depreciation? Learn more: How to Calculate Rental Property Depreciation

The Bottom Line

Most rental property closing costs won’t give you an instant write-off—but they can unlock serious long-term savings through depreciation. And with the One Big Beautiful Bill Act bringing back 100% bonus depreciation and expanding Section 179, those savings just got a big upgrade.

But here’s the catch: you need the right team to make it happen. Generic tax software and one-size-fits-all firms can’t keep up with the complexities of real estate. At Town, our real estate-focused CPAs dig deep to make sure every deductible dollar gets claimed—and nothing gets missed.

Don't leave money on the table. Contact Town today to schedule a consultation with our real estate tax specialists and discover how much you could be saving.

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Disclaimer: This content is for educational purposes only and does not constitute personalized tax advice. Tax laws are complex and subject to change. Individual circumstances can vary significantly, and strategies that work for one taxpayer may not be suitable for another.