deduction or basis for sellers settlement statement of a rental property

[coleman07_1963]

I am struggling to find clear instructions on how to treat each line item in a settlement statement as the SELLER of a rental condo unit. I found a document online for a buyer and then at the bottom, it states that for the seller, basis items are deductible. 

I would appreciate knowing if the following items are deductible on the seller's end vs adding to the cost of the sale. 

Title insurance and service fee

Closing fee

1031 exchange document fee

1031 exchange fee

change fees for HOA's

real estate taxes

commissions

service charges

status letter for HOA

Home Warranty

I really appreciate the help on this because everything I see is oriented to the buyer which will be helpful when I add the new property to TT.

[ColeenD3]

These are not deductible. The expenses below are added to the basis. Just because something was on the closing statement, it doesn't mean that you can include it.

• Title fees
• real estate commissions
• documentary stamps
• credit report costs
• costs of an abstract
• transfer taxes
• home inspection
• flood certificate
• attorney fees, etc.  

[coleman07_1963]

Coleen,

This is also on the seller side? I only ask because I found an article that said if the seller, deduct these expenses.

This may be why I had "cash" left over in the 1031 exchange because I should have called these sales expense which would zero out the cash and defer the tax.

[gloriah5200]

For the sale or purchase of Real Property:

Settlement costs.

Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash. 

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

Settlement costs don't include amounts placed in escrow for the future payment of items such as taxes and insurance. 

The following items are some settlement fees and closing costs you can't 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.

   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.

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.

Points.

If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), don't add the points 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 4 of Pub. 535.

Points on home mortgage.

Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. If certain requirements are met, you can deduct the points in full for the year in which they're paid. Reduce the basis of your home by any seller-paid points. For more information, see Points in Pub. 936, Home Mortgage Interest Deduction.

Assumption of mortgage.

For additional information, please refer to the following link:

IRS Publication 551 Basis of Assets

However, a 1031 Exchange can be very different.  You must know the adjusted basis of the property given up, in addition to calculating the adjusted basis of the property received.

Refer to the following information regarding like-kind exchanges reported on Form 8824:

IRS Information on Like-Kind Exchanges

[Edited 03/01/2021|7:31 pm pst]

[Carl]

as the seller, the only expenses you have are all related to the disposition of the property. You don't have any expenses related to the acquisition or disposition of a mortgage. So for you, expenses related to the disposition of the property are added to your cost basis of the property. As an example, that would include title transfer fees if you the seller actually paid those fees. (typically, the buyer pays all the property acquisition fees - but not always.)

Any commission paid out of your gain on the sale, is also added to your cost basis. Typically, that's about the only thing the seller can add to their cost basis. If you've got a HUD-1 closing statement, you'll note that "just about" all of the fees related to the transfer of the property (not the loan) are under the buyer's column.