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Cost Basis — Real Property: Tax Basis (2025 IRS Guide)

This guide covers “Cost Basis — Real Property” within tax basis. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 551 (12/2025), Basis of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.

Sales tax.
Freight.
Installation and testing.
Excise taxes.
Legal and accounting fees (when they must be capitalized).
Revenue stamps.
Recording fees.
Real estate taxes (if assumed for the seller).

Cost Basis — Real Property

Real property, also called real estate, is land and generally anything built on or attached to it. If you buy real property, certain fees and other expenses become part of your cost basis in the property.

Real estate taxes.

If you pay real estate taxes the seller owed on real property you bought, and the seller didn't reimburse you, treat those taxes as part of your basis. You can't deduct them as taxes.

If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Don't include that amount in the basis of the property. If you didn't reimburse the seller, you must reduce your basis by the amount of those taxes.

Settlement costs.

Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.

The following items are some of the settlement fees or closing costs you can include in the basis of your property.

Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including title search and preparation of the sales contract and deed).
Recording fees.
Surveys.
Transfer taxes.
Owner's title insurance.
Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Settlement costs don't include amounts placed in escrow for the future payment of items such as taxes and insurance.

The following items are some settlement fees and closing costs you can't include in the basis of the property.

Casualty insurance premiums.
Rent for occupancy of the property before closing.
Charges for utilities or other services related to occupancy of the property before closing.
Charges connected with getting a loan. The following are examples of these charges.
1. Points (discount points, loan origination fees).
2. Mortgage insurance premiums.
3. Loan assumption fees.
4. Cost of a credit report.
5. Fees for an appraisal required by a lender.
Fees for refinancing a mortgage.

If these costs relate to business property, items (1) through (3) are deductible as business expenses. Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan.

Points.

If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), don't add the points to the basis of the related property. Generally, you deduct the points over the term of the loan.

Points on home mortgage.

Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. If certain requirements are met, you can deduct the points in full for the year in which they're paid. Reduce the basis of your home by any seller-paid points. For more information, see Points in Pub. 936, Home Mortgage Interest Deduction.

Assumption of mortgage.

If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.

Example.

If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000.

Constructing assets.

If you build property or have assets built for you, your expenses for this construction are part of your basis. Some of these expenses include the following costs.

Land.
Labor and materials.
Architect's fees.
Building permit charges.
Payments to contractors.
Payments for rental equipment.
Inspection fees.

In addition, if you own a business and use your employees, material, and equipment to build an asset, don't deduct the following expenses. You must include them in the asset's basis.

Employee wages paid for the construction work, reduced by any employment credits allowed.
Depreciation on equipment you own while it's used in the construction.
Operating and maintenance costs for equipment used in the construction.
The cost of business supplies and materials used in the construction.

Caution:

Don't include the value of your own labor, or any other labor you didn't pay for, in the basis of any property you construct.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

Publication 551 (12/2025), Basis of Assets: Cost Basis — Real Property — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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