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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4063
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am the owner of a 4 unit investment property which we just

Resolved Question:

I am the owner of a 4 unit investment property which we just purchased. I have 2 tax questions I would love to understand better.

1. What of my closing costs are tax deductible? I know the points associated with the loan are, but are any of the other costs -- transfer taxes, recording charges, etc.?

2. We are putting a new roof on the building. Do I need to amortize that over 27.5 year? I don't expect the roof to last that long. Can I amortize over a shorter period more consistent with the life of the roof -- say 10 years? Ideally, I would like to just write it down in full.

2a. What would happen if i were to write it down now and got audited? I am showing a loss regardless of this expense for the next 5 or so years (unless the rental market suddenly becomes really strong), so I don't owe any taxes in the near future.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, the best way to give you this, is to tie it to the HUD-1 statement line ... to avoid overlap and show where some things need to be adjusted (amount paid by seller, fo example)

NPVAdvisor :

101. Contract sales price – This is the purchase price of the property and must be depreciated

NPVAdvisor :

By the way, even if you are buying a condo, you must allocate part of this purchase price to the land that the house, building or condo sits on. The cost allocated to the land may not be deducted, depreciated or amortized. The amount that should be allocated to the land will vary based on the size and location of the property, but it is common practice to allocate 10% to 25% of the purchase price to the land.

NPVAdvisor :

  • 102 Personal property – This is the purchase price of any personal property included with the property and must be depreciated.

NPVAdvisor :

Adjustments for items paid by seller in advance




  • 106. City/town taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 210

  • 107. County taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 211

  • 108. Assessments – These are allowed as a current rental deduction but must be reduced by any amount on Line 212. However, if the assessments are specifically labeled as local improvement district (LID) assessments, they are not currently deductible and must be amortized over the life of the loan.


NPVAdvisor :

200. Amounts Paid By Or In Behalf Of Borrower




  • 201. Deposit or earnest money

  • 202. Principal amount of new loan(s)

  • 203. Existing loan(s) taken subject to




These amounts are all included in the purchase price on lines 101 and 102 above. The amounts on line 201, 202 and 203 do not get separately deducted or amortized, but the interest paid over the life of the mortgage is deductible when paid.


NPVAdvisor :

Adjustments for items unpaid by seller




  • 210. City/town taxes

  • 211. County taxes

  • 212. Assessments

     






These amounts reduce any deductible amounts on lines 106, 107 and 108 above.


NPVAdvisor :

.

NPVAdvisor :

Now lets go to page 2

NPVAdvisor :

.

NPVAdvisor :

700. Total Sales/Broker’s Commission – This is paid by the seller and has no tax effect on the buyer.

NPVAdvisor :

800. Items Payable In Connection With Loan




  • 801. Loan origination fee

  • 802. Loan discount

    These items must be amortized over the life of the loan.


    TIP: Many people think that these amounts (usually referred to as points) are a current tax deduction. However, the only time that points are allowed as a current deduction is if the points are paid in connection with the purchase of a primary residence. Points paid in connection with the purchase of an investment property or paid on a refinancing of a personal residence or an investment property must be amortized over the life of the loan.



  • 803. Appraisal fee

  • 804. Credit report

  • 805. Lender’s inspection fee

  • 806. Mortgage insurance application fee

  • 807. Assumption fee

    These items must be amortized over the life of the loan.




NPVAdvisor :

900. Items Required By Lender To Be Paid In Advance



  • 901. Prorated interest – Deductible as a current rental expense.

     


    TIP: This amount will usually appear on Form 1098 that you will receive at the end of the year showing how much interest you paid during the year. However, not all lenders include this amount on the form so be sure to check with your lender to find out.




  • 902. Mortgage insurance – Amortized over the period the payment covers, which is usually one year



  • 903. Hazard insurance – Amortized over the period the payment covers, which is usually one year


NPVAdvisor :

1000. Reserves Deposited With Lender



  • 1001. Hazard insurance.

  • 1002. Mortgage insurance.

  • 1003. City property taxes.

  • 1004. County property taxes.

  • 1005. Annual assessments

    These amounts are deposited (escrowed) with the lender and are deductible when they are disbursed from escrow by the lender. These amounts paid from escrow should be reported on your Form 1098 at the end of the year.



NPVAdvisor :

1100. Title Charges



  • 1101. Settlement or closing fee

  • 1102. Abstract or title search

  • 1103. Title examination

  • 1104. Title insurance binder.

  • 1105. Document preparation

  • 1106. Notary fees

  • 1107. Attorney’s fees

  • 1108. Title insurance

  • 1109. Lender’s coverage

  • 1110. Owner’s coverage

     


    All of these amounts are added to the cost basis of the property (line 101) and must be depreciated.



NPVAdvisor :

1200. Government Recording and Transfer Charges



  • 1201. Recording fees

  • 1202. City/county tax/stamps

  • 1203. State tax/stamps

     


    These amounts are added to the cost basis of the property (line 101) and must be depreciated.




1300. Additional Settlement Charges



  • 1301. Survey

  • 1302. Pest inspection

     


    These amounts are added to the cost basis of the property (line 101) and must be depreciated.


     



NPVAdvisor :

Finally, there may be other miscellaneous closing costs that you may pay in connection with buying an investment property. While the tax treatment of these amounts may vary, the general rules of thumb are that the costs associated with operating the property (such as real estate taxes and insurance) are deductible as current expenses, the costs associated with obtaining the mortgage (such as lender fees and mortgage application fees) must be amortized over the life of the loan and the costs associated with purchasing the property (such as title charges and recording fees) must be added to the cost basis of the property and depreciated.

NPVAdvisor :

On the roof, that IS considered part of the property and must be depreciated over 27.5 years

NPVAdvisor :

Here's the IRS guidance on this:


2012 Publication 527 - Internal Revenue Service

NPVAdvisor :

Questions?

NPVAdvisor :

I still don't see you coming into the chat here, so I'll move us to the "Q&A" mode, where you can ask any follow-up questions

NPVAdvisor :

Let me know ....

NPVAdvisor :

Lane

Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 1 year ago.


Hi Aaron,

... just checking back in here, as I never saw you come into the chat.

Let me know if you need more on this or have any clarifying questions.

Thanks
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4063
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 5 months ago.

Sorry for the tardy response. I finally got a chance to pull out my closing statement and walk through your answer. Lots of detail, which I appreciate, but it sounds like the gist of it is that most of these expenses need to be amortized.


 


Thanks for your help!!

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