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

• Sales tax charged on the purchase.
• Freight charges to obtain the property.
• Installation and testing charges.
• Excise taxes.
• Legal and accounting fees (when they must be capitalized).
• Revenue stamps.
• Recording fees.
• Real estate taxes (if assumed for the seller).
• Commissions.

In addition, the cost basis of real estate and business assets may include other items.

Loans with low or no interest. If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. You generally have unstated interest if your interest rate is less than the federal rate that applies.

For more information, see Unstated Interest in Publication 537.

Real Property

If you buy real property, certain fees and other expenses you pay are part of your basis in the property. Real property is land and generally anything built on, growing on, or attached to land. For example, a building is considered real property.

Assumption of a mortgage. If you buy property subject to (or assume) an existing mortgage, your basis includes the amount you pay for the property plus the unpaid mortgage.

Settlement costs. You can include in the basis of property you buy the settlement fees and closing costs you pay for buying the property. You cannot include fees and costs for getting a loan on the property. (A fee for buying the property is any fee you would have had to pay if you bought the property for cash.)

The following costs are some of the settlement fees or closing costs that 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.

You must properly allocate these fees or costs between land and improvements, such as buildings, to figure the basis for depreciation of the improvements. Allocate the fees according to the fair market values of the land and improvements at the time of purchase. Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having a reasonable knowledge of all necessary facts. Sales of similar property on or about the same date may be helpful in figuring the FMV of the property.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

The following costs are some of the settlement fees and closing costs that you cannot include in the basis of property.

1. Fire insurance premiums.
2. Rent for occupancy of the property before closing.
3. Charges for utilities or other services related to occupancy of the property before closing.
4. Fees for refinancing a mortgage.
5. Charges connected with getting a loan. The following items 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.

Real estate taxes. If you buy real property (real estate) and agree to pay taxes the seller owed on it, treat the taxes you pay as part of your basis. You cannot deduct them as taxes paid.

If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount. Do not include that amount in the basis of the property.

Points. If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the cost to the basis of the related property. Generally, you deduct the points over the term of the loan. For more information on how to deduct points, see Points in chapter 8 of Publication 535.

Points on home mortgage. Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. If they meet certain requirements, you can fully deduct them in the year paid. If you deduct seller-paid points, reduce your basis by that amount. For more information, see Points in chapter 25.

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