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What closing costs from the rental property I purchased can I deduct?

Forum|Forum|7 years ago
June 7, 2019
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I purchased a rental property in 2016. At closing, I paid various origination charges, services, and title services. Where and which of these do I list?

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Best answer by

Expert Reviewed

The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include:

* Abstract fees,

* Charges for installing utility services,

* Legal fees,

* Recording fees,

* Surveys,

* Transfer taxes,

* Title insurance, and

* 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.

* Those costs that are basis adjustments can be part of your yearly depreciation deduction for the rental property.

For additional information, refer to Publication 527, Residential Rental Property, Publication 17, Your Individual Income Tax Guide, and Publication 535, Business Expenses. Several closing costs cannot be deducted and are not added to basis. Please see Publication 527 page 12 for more information.

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

1. Casualty 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.Charges connected with getting a loan. The following are examples of these charges.

Points (discount points, loan origination fees).

Mortgage insurance premiums.

Loan assumption fees

Cost of a credit report.

Fees for an appraisal required by a lender.

5.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.

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

See TurboTax article.

A

Anonymous

Answer

Expert Reviewed

The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include:

* Abstract fees,

* Charges for installing utility services,

* Legal fees,

* Recording fees,

* Surveys,

* Transfer taxes,

* Title insurance, and

* 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.

* Those costs that are basis adjustments can be part of your yearly depreciation deduction for the rental property.

For additional information, refer to Publication 527, Residential Rental Property, Publication 17, Your Individual Income Tax Guide, and Publication 535, Business Expenses. Several closing costs cannot be deducted and are not added to basis. Please see Publication 527 page 12 for more information.

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

1. Casualty 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.Charges connected with getting a loan. The following are examples of these charges.

Points (discount points, loan origination fees).

Mortgage insurance premiums.

Loan assumption fees

Cost of a credit report.

Fees for an appraisal required by a lender.

5.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.

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

See TurboTax article.

J

jr11

Level 2

what do i do if i failed to add the additional closing cost allowances to the cost basis in prior tax returns? should i add those to the cost basis this year or not?

A

Arbasd

Level 2

I am not sure how you handled the original closing costs. But you should go back and amend up to 3 years of returns and report it correctly. If you elect not to do so at the very least you should adjust the basis of the property and report the depreciation correctly going forward. If you are ever audited the IRS will calculate the deprecation correctly because the rule is Allowed or Allowable.