Is an appraisal fee to remove PMI from rental loan a deductible expense?

[Telcontar]

I converted my primary residence to a rental property in 2020. Then in 2021 I had the property assessed (but not refinanced) and the appreciation was enough to eliminate the need for Private Mortgage Insurance. Was the cost of the appraisal a deductible expense?

[ColeenD3]

No, this is not a deductible expense.

You can't take expenses on a personal home. It is not officially a rental property until it is placed in service and available for rent. That doesn't happen until it is no longer your home and a tenant could move in at any moment.

[Telcontar]

Thank you Coleen, but to clarify, the property had been a rental for over a year when I paid for the appraisal. So would this expense be deductible? It was an expense incurred in order to eliminate PMI on the mortgage AFTER the property was converted to a rental and tenants had leased the property.

[ColeenD3]

It is still not a rental expense. This was not something you needed to do in order to rent the property. Just because you spend money on something, that doesn't always mean you can expense it.

This is the list of expenses from the IRS includes:

Types of Expenses

Listed below are the most common rental expenses.

• Advertising.

• Auto and travel expenses.

• Cleaning and maintenance.

• Commissions.

• Depreciation.

• Insurance.

• Interest (other).

• Legal and other professional fees.

• Local transportation expenses.

• Management fees.

• Mortgage interest paid to banks, etc.

• Points.

• Rental payments.

• Repairs.

• Taxes.

• Utilities.

On further research, the IRS also says this can't be added to the basis.

The following are settlement fees and closing costs you can’t include in your basis in the property.

1. Fire insurance premiums.

2. Rent or other charges relating to occupancy of the property before closing.

3. Charges connected with getting or refinancing a loan, such as:

   1. Points (discount points, loan origination fees),

   2. Mortgage insurance premiums,

   3. Loan assumption fees,

   4. Cost of a credit report, and

   5. Fees for an appraisal required by a lender.

[Carl]

Basically, there are two types of expenses associated with a real estate mortgage.

 - Those expenses associated with acquisition of the property are added to the cost basis of the property, which gets capitalized and depreciated over time, based on the MACRS classification of the property. Appraisal fees are not associated with acquisition of the property.

 - Those expenses associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan. This would include things like appraisal fees if the appraisal is a requirement of loan approval. However, your appraisal fee was not a requirement of loan approval since you already have the approved loan. Therefore it's just flat out not a deductible expense anywhere on the tax return.