Real Estate Checklist for Calculating Cost-Basis & Selling Expenses

A property’s gain is computed as:

Amount Realized (sale price − selling expenses) − Adjusted Basis (purchase price + acquisition costs + capital improvements − depreciation/credits/exclusions).

Every dollar properly captured on either side generally reduces taxable gain. Most taxpayers under-report basis because settlement statements get filed away and remodel receipts get tossed. Below is the full universe of items to look for.

Having great record keeping is often harder for people than performing the actual work on their property. However, the value received, in the form of lower taxes, is often worth much more per hour than the work itself. Therefore, I must stress that you keep copious notes and records for all your real estate holdings.

I also want to take this time to point out one of the most painful and costly mistakes I see from both real estate investors and tax professionals is thinking they can buy a “flip” and report the income as capital gains, often after one year, seemingly making the gain a long-term capital gain instead of the actual earned income the profits should be reported as. An oversimplification is that if the intent is to “flip,” buy, fix up, and sell, it’s generally NOT a capital gain, it’s a business and therefore should generally be reported as business income subject to ordinary tax rates and the dreaded “self-employment/FICA” tax. While many (incorrectly) tax professionals that don’t understand real estate taxation as well as they should may say “never put a real estate investment into an entity taxed as a S-Corp,” house flipping happens to be one where it often makes financial sense to do so.

I wrote an article on this subject you can read here -> Real Estate Dealer or Real Estate Investor Taxation — Don’t Get Caught In a Taxation Trap

Phase 1 — Acquisition costs (added to basis at purchase)

From the buyer’s settlement statement / closing disclosure

Purchase price (cash + assumed mortgage + notes given + property given in exchange)
Title insurance — owner’s policy (lender’s policy is a loan cost, not basis)
Title search / title abstract / title examination fees
Recording fees (deed, mortgage)
State, county, and municipal transfer taxes / documentary stamps / deed stamps (whichever side paid)
Settlement / closing / escrow fees
Attorney fees related to the purchase
Notary, courier, e-recording, and wire transfer fees
Survey fees (boundary, ALTA, plot)
Elevation certificate (flood zones)
Tax service fee
HOA capital contribution / initiation fee / transfer fee (buyer-side)
Liens, mechanic’s liens, judgments, or back HOA dues assumed at closing
Back property taxes the buyer agreed to pay (not currently-due prorations)
Special assessments assumed (sidewalk, sewer, lighting, PACE balances)

Pre-purchase due diligence (whether or not they appear on the closing statement)

General home inspection
Termite / wood-destroying-organism inspection
Radon, mold, asbestos, lead paint inspections
Septic inspection / pumping at inspection
Sewer scope / sewer-line camera
Well water testing
Roof, chimney, pool/spa, foundation, HVAC, electrical, plumbing inspections
Engineer’s report / structural inspection
Phase I or II environmental site assessment
Pre-purchase appraisal (when buyer-paid)
Option/earnest money fees that didn’t reduce the purchase price
Due-diligence period fees

Costs typically on a settlement statement that DO NOT add to property basis (note for your readers)

Loan origination fees, discount points, underwriting, processing, application, credit report, lender’s appraisal, lender’s title insurance, flood certification, mortgage broker fees — these are loan costs, not property basis. Points on a primary-residence purchase mortgage may be currently deductible as mortgage interest.
VA funding fee, USDA guarantee fee, FHA upfront MIP — financed loan charges, not property basis.
Prepaid mortgage interest, prepaid property tax, prepaid insurance, escrow reserves — current-year deductions or cash-flow timing items, not basis.
Buyer’s prorated property taxes, prepaid HOA dues — these are deductible (if at all) on Schedule A, not basis.

Items that REDUCE basis at purchase

Seller-paid concessions / closing-cost credits
Seller-paid points
Buyer rebates from the agent
Government grants or subsidized financing received

Phase 2 — Improvements and carrying costs during ownership

Capital improvements — by category

Structural and envelope

Room additions, second-story additions, dormers, bump-outs
Garage additions or detached garages, carports
Decks, porches, screened-in porches, sunrooms, patios (permanent)
Foundation work, underpinning, pier replacement, leveling
Earthquake / hurricane retrofitting and tie-downs
Basement waterproofing, French drains, sump pump systems, egress windows
Retaining walls
Termite, asbestos, lead paint, mold, or radon remediation systems (full mitigation, not periodic treatment)

Roof and exterior

Full roof replacement, new gutters, new downspouts
New siding, stucco, brick work, stone veneer
Full exterior repaint
New windows and exterior doors (full replacement)
New garage door and opener
Fascia, soffit, trim replacement
Skylights, solar tubes

Kitchen

Full or partial remodel, new layout
Cabinets, countertops, backsplash
Built-in appliances (cooktop, wall oven, range, dishwasher, microwave, refrigerator if built-in)
Range hood and new ductwork
Sinks, faucets, garbage disposal, instant hot water
Built-in kitchen lighting, under-cabinet lighting

Bathrooms

Full bathroom remodel or new bathroom addition
Tubs, showers, tile surround, glass doors
Vanities, sinks, faucets, mirrors (built-in), medicine cabinets
Toilets, bidets
Heated floors, towel warmers, steam systems
Whirlpool / soaking tub / spa tub
Exhaust fans, vent stacks

HVAC and major systems

Furnace, AC condenser, heat pump, mini-splits
New ductwork or full ductwork replacement
Boilers, radiators, baseboard heating
Tankless or replacement water heaters
Geothermal systems
Solar PV (basis reduced by credit claimed — see Phase 4)
Solar water heating
Whole-house humidifier / dehumidifier / air purifier / HEPA system
Smart thermostats and zone controls (when integrated)
Whole-house generators, transfer switches

Electrical

Service panel upgrade (e.g., 100A → 200A)
Whole-house rewiring or knob-and-tube replacement
New circuits, outlets, switches, GFCIs, AFCIs
Hardwired lighting, recessed lighting, chandeliers (if attached)
Whole-house surge protector
EV charger installation (basis after any credit)
Hardwired security and fire alarm systems
Cat6 / Ethernet / coax / fiber wiring
Hardwired smoke and CO detectors

Plumbing

Repipe (PEX, copper, PVC)
Sewer-line replacement, cleanouts
Water main replacement
Whole-house water filtration / softener
New well, well pump, pressure tank
Septic system installation, drain field, septic tank replacement
Hot water recirculation pumps
Backflow preventers

Insulation and energy efficiency

Attic, wall, basement, rim-joist, crawl-space insulation
Spray foam, blown-in cellulose, batt
House wrap, vapor barrier
Air sealing
Energy-efficient windows and doors (basis after any credit)

Floors, walls, ceilings

New hardwood, tile, stone, vinyl plank, laminate, carpet (full replacement)
Subfloor repair / replacement
Floor refinishing (substantial sand-and-refinish)
Drywall replacement, plaster repair
Crown molding, baseboards, wainscoting, shiplap, paneling
Acoustic treatments
New paint (full repaint as part of improvement project)

Site and exterior improvements

Driveways and aprons (asphalt, concrete, paver)
Walkways, paths, stairs
Fencing (new install or full replacement)
Significant landscaping (regrading, mature trees, sod)
Sprinkler / irrigation systems
Outdoor hardwired lighting
In-ground pools, pool decks, pool fencing, pool equipment
Hot tubs and spas (built-in)
Outdoor kitchens, fire pits (permanent)
Pergolas, gazebos, outdoor structures (permanent)
Sheds and outbuildings (permanent)
Boat docks, sea walls
Excavation, grading, drainage, French drains
Tree removal (when part of a project)
Concrete work generally

Specialty / accessibility

Wheelchair ramps, widened doorways, roll-in showers, grab bars (also potentially a medical-expense deduction — be careful not to double-dip)
Stair lifts, residential elevators, dumbwaiters
Saunas, steam rooms, wine cellars, home theaters (built-in)
Smart-home integration (built-in)
Tornado shelters / safe rooms

Soft costs that capitalize alongside hard costs

Architect, designer, engineer, draftsperson fees
Plans, blueprints, 3D renderings
Permits — building, electrical, plumbing, mechanical, demolition, excavation, special-use, variance
Plan-check fees, plan-review fees
Impact fees, tap fees, connection fees, capacity fees
Surveyor fees during the project
Code-compliance / bring-up-to-code costs
General contractor fees and markups
Subcontractor invoices (electrical, plumbing, HVAC, framing, drywall, paint, finish carpentry, tile, flooring, roofing, masonry, concrete, excavation, demo, landscape)
Labor on contractor receipts (your own labor never capitalizes)
Materials at retail (Lowe’s, Home Depot, Menards, ProBuild, lumber yards, tile shops, plumbing supply, electrical supply, paint stores)
Equipment and tool rental (excavator, scaffolding, lifts, scissor lift, compactor)
Construction debris removal — dumpsters, hauling, dump fees
Demolition costs
Construction site cleanup
Temporary construction fencing
Builder’s risk / vacant-home insurance during construction
Workers’ comp paid for direct-hire labor

Carrying costs on investment property — §266 election

For property held for investment that is not currently producing income (vacant lot, mid-renovation, between tenants), you can elect under IRC §266 to capitalize carrying costs into basis instead of losing the deduction. Election is made annually with a statement attached to the return. Eligible items:

Property taxes paid during the holding period
Mortgage interest paid during the holding period
Insurance premiums (homeowners, vacant-home, builder’s risk, liability)
HOA dues
Utilities maintained on the property (gas, electric, water, sewer, trash)
Lawn care, snow removal, basic maintenance to preserve the property
Property management fees
Security / monitoring during vacancy

This is a powerful and underused tool. For a never-occupied flip, every month of carrying costs can be added to basis with a §266 statement.

Casualty / restoration during ownership

Costs to restore property after a casualty (after netting any insurance proceeds)
Items added during restoration that improve beyond original condition

Repairs vs. improvements — what your readers need to know

For a personal residence, repairs (patching, painting touch-up, fixing a leak, appliance service) are not deductible AND don’t add to basis — they’re personal expenses. Only true capital improvements add to basis. Adding an addition is an example of a capital expense.

For rental property, repairs are currently deductible against rental income; improvements are depreciated separately.

For a flip / capital-asset investment property never used as residence and never rented, repair-vs-improvement essentially collapses — both are capitalized into basis because there’s no other place to put them. However, if you rent the property, you don’t generally add to your basis for expenses that are over and above your rental income. Depending on your total income and your occupation, you may be able to reduce your total taxable income as a result of losses (paper or actual) from rental activity.

The IRS three-prong improvement test (Treas. Reg. §1.263(a)-3): a cost is a capital improvement if it is a Betterment, Restoration, or Adaptation to a new use (“BRA test”). Any project that touches multiple components, replaces a major component, fixes a pre-existing defect, or extends useful life is generally an improvement.

Phase 3 — Selling expenses (reduce amount realized)

Keep in mind you don’t capitalize selling expenses. Selling expenses are what they say they are, namely expenses

Real estate commissions and marketing

Listing-side commission (typically 2.5–3%)
Buyer’s-side commission (typically 2.5–3%)
Co-broke / referral fees
iBuyer service fees (Opendoor, Offerpad, etc.)
MLS listing fees, flat-fee MLS services
Professional photography, drone / aerial photography
3D virtual tours (Matterport), videography
Floor plan illustrations
Premium online listing placement
Yard signs, open-house signs
Print advertising, direct mail
Real estate magazine ads
Open-house catering and promotional costs

From the seller’s settlement statement

Title insurance (owner’s policy if seller-paid per local custom)
Settlement / closing / escrow fees (seller side)
Recording fees for release / reconveyance
State, county, municipal transfer taxes, documentary stamps, deed stamps (seller side)
Mansion tax / luxury transfer tax in high-value markets
Attorney fees for closing
Notary, courier, wire transfer, e-recording fees
HOA estoppel fee, transfer fee, payoff statement fee, capital reserve transfer
Tax service fee, document preparation fee
Reconveyance / release-of-lien recording fees
1099-S filing fees if charged
FIRPTA-related costs (foreign-seller withholding administration)

Pre-listing prep (selling expenses, not improvements)

Pre-listing inspection, pre-listing appraisal
Termite, radon, septic, roof, sewer-scope, pool inspections required for sale
Roof, chimney, septic, well certifications
Staging consultation, professional staging, furniture rental during listing
Move-out and move-in for staging
Storage unit rental during listing (decluttering)
Deep cleaning, carpet cleaning, window cleaning
Pressure washing, gutter cleaning
Yard cleanup, mulch, fresh sod, seasonal flowers (curb appeal)
Touch-up paint specifically for sale
Minor repairs done at the request of the agent or buyer
Repairs negotiated post-inspection (before closing)

Concessions and credits to buyer

Closing-cost credit to buyer
Repair credit to buyer
Carpet / decorating / flooring allowance
Buy-down points / rate-buydown paid by seller
Home warranty paid by seller for buyer
Move-in allowance
HOA dues prepaid for buyer

Mortgage and lien payoff costs (seller side)

Mortgage payoff statement / demand fee
Recording fee for release of mortgage
Reconveyance / trustee fee
Subordination fees
Wire fee for payoff
Mortgage prepayment penalty (often deductible as interest instead — verify)
Lien releases (judgment, mechanic’s, tax)

Owner-financing and 1031-related (when applicable)

Setup fees for installment-sale escrow
Servicing setup
Qualified Intermediary fees
1031 exchange documentation
Replacement-property identification fees

Phase 4 — Items that REDUCE basis (don’t miss these the other direction)

These don’t help the taxpayer, but missing them creates audit exposure if you over-claim basis:

Depreciation taken during any rental or business-use period (must reduce basis even if depreciation was allowable but not actually taken — “allowed or allowable” rule)
Casualty loss deductions previously claimed
Insurance proceeds received and not used to restore the property
Section 121 exclusions previously used (only matters for the same property if claimed twice — rare)
§1031 exchange carryover basis from a relinquished property
Tax credits taken — basis is reduced by the amount of the credit:
- Residential Clean Energy Credit (solar, geothermal, wind, fuel cell — 30%)
- Energy Efficient Home Improvement Credit (windows, doors, insulation, HVAC, etc.)
- Historical first-time homebuyer credit (if applicable)
- State-level energy / efficiency credits
- PACE financing forgiveness
Subsidized energy financing (limited reduction)
Easements granted for compensation
Eminent domain proceeds retained and not reinvested

Special-situation basis rules

Inherited property — basis is FMV at decedent’s date of death (or 6-month alternate valuation date if elected). Improvements made by the decedent are subsumed into the stepped-up FMV.
Gifted property — carryover basis from the donor (with adjustments for gift tax paid attributable to appreciation), or FMV at gift date if used to compute a loss.
Property received in divorce — carryover basis under §1041 (no step-up).
Property received from a like-kind exchange — carryover basis with adjustments.
Property converted from personal use to rental — basis for depreciation is lower of cost or FMV at conversion; basis for gain on sale is regular adjusted basis.
Property converted from rental to personal use — accumulated depreciation still reduces basis on eventual sale.
Mixed-use properties (home office, partial rental) — basis must be allocated.

Documentation checklist – The IRS loves documents, and therefore, give the IRS some love so you’ll get some love

To support every line item above, keep:

Settlement statement / closing disclosure for purchase and sale
Recorded deed, title insurance policy
All loan documents (for proration analysis even though loan costs aren’t basis)
Every contractor invoice with date, scope, address, amount, payment method
Every materials receipt (Menards, Home Depot, Lowe’s, etc.) — annotate by project
Every permit and inspection card
Every architect/engineer/designer invoice
Bank or credit-card statements highlighting project spending (backup if receipts are lost)
Cancelled checks
Photos before, during, and after each project (date-stamped)
Property tax bills paid during ownership
Insurance policies during ownership
Any §266 elections filed
Casualty insurance claim records
Depreciation schedules from rental periods
Form 1099-S received at sale
Records of any tax credits claimed against the property

The fine print. While I am a tax attorney working with real estate investors daily, I’m not YOUR attorney (unless of course we’re already working together and have an engagement agreement, and if so, thank you, I appreciate your confidence in me. You should also know I’ll provide a checklist). Additionally, this is by its very nature general educational information not fitted to any given taxpayer with any given set of facts and circumstances.

In other words, I really hope this is helpful, albeit it can only be helpful if used as a starting point, and perhaps a reminder of things to discuss with your tax professional and advisor. Speaking of tax professionals, let me end with there’s a big material misunderstanding among most real estate investors in so much as they ‘think’ their tax preparer is a tax advisor. This mistake cost real estate investors so much money so often that I’ve reached a point that I expect first meetings to go along the lines of “after reviewing your previous tax returns, it appears you overpaid by nearly enough to use as your next downpayment.” – I wish I was joking, I’m not.

You don’t have to hire me, but if you send your financial information to a tax preparer and you also have any sizable real estate investments and/or business operations, you should expect to receive a multiple of the fee you’ll pay a competent tax advisor.

Contractor house image by jarmoluk

Selling an Investment Property – Make Sure to Add All Your Expenses