Can I deduct these attorney, court, and recording fees for rental properties?

[hativered]

In mid 2020 I paid attorney, court, and recording fees to facilitate a change in title on rental properties.  It was to change title from the name of a deceased person (who had 100% ownership interest) to the decedent's beneficiaries. By that time, the deceased owner had already been dead for a number of years, during which the beneficiaries assumed "ownership" in all aspects of that term EXCEPT for being on title (which only occurred in mid 2020). That is to say, the beneficiaries began receiving income, paying expenses, and managing the rentals even before title was officially changed. They calculated their basis as the FMV at the date of death of the decedent and started doing their own Sched E's. 

(Looking back, I realize it may have been more proper for the beneficiaries to let everything related to the rentals flow through the decedent's estate, and to file a fiduciary return, etc., until title was officially changed.) 

Do these types of expenses ordinarily get added to the cost basis for "acquiring" the property (and thus depreciated accordingly over 27.5 years)? Is there any easy way to deduct these expenses now? It's about $2k of expenses.

[RayW7]

The correct way to report these costs would be to add them to your basis.

According to Rental Expenses | Internal Revenue Service-

Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes.

Many other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including:

• Abstract fees
• Charges for installing utility services
• Legal fees
• Recording fees
• Surveys
• Transfer taxes
• Title insurance
• Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, sales commissions and charges for improvements or repairs).

[Carl]

The costs you specifically mention are all acquisition costs. When it comes to real estate, there are two possible types of acquisition costs.

- Cost incurred in acquiring the loan are amortized and deducted over the life of the loan. I am assume that no mortgage is involved here. Therefore, you don't have any of these costs.

- Cost incurred in acquiring the real estate property are added to the cost basis of the property and get depreciated over time. So the cost you paid (as you have identified them) are all property acquisition costs. They are not deductible. Instead, they get added to the cost basis of the property only "IF" those costs were paid by the beneficiary recipient. If they were paid for out of the estate, (I assume the estate of the deceased was still active in 2020 and therefore required to file the 1041)  then the estate gets to flat out deduct them

Do these types of expenses ordinarily get added to the cost basis for "acquiring" the property (and thus depreciated accordingly over 27.5 years)?

Yes. Now if the benificiary recipient has been reporting this property on SCH E as a part of their personal tax return "prior" to 2020, there's two ways to deal with this. Unless someone knows of a rule or law that prevents this, I recommend the first way, so that it won't screw with the depreciation history of the property.

Method 1:

Lets "assume" these costs are $2,000 exactly.

In the assets/depreciation section work through the rental property asset itself. When you get to the screen with the cost basis information on it, add $2000 to the amount in the COST box. Then add $2000 to the amount in the COST OF LAND box.

This will add $2000 to the cost basis of the land, without changing the cost basis of the structure. This way, since land is not depreciated, the depreciation history on the structure is not screwed up.

Method 2:

Enter an entirely new asset and call it "property acquisition costs". The "in service" date for the asset will be the date the title transfer was recorded. The asset will be classified as "Residential Rental Real Estate" and depreciated over the next 27.5 years.

The reason I suggest Method 1, is because depreciating a mere $2-3000 over 27.5 years comes out to roughly $100 a year at best. That's just not going to have any impact on the tax liability at all over that depreciation period.