lender and owner title insurance for rental property cost basis

[anilj]

When calculating the cost basis adjustments for a new property purchase, we can add the title insurance to the cost basis.

But it's not clear if we should add both Lender title insurance (ALTA loan policy) and the homeowner policy. Do both count towards cost basis? Both of them were paid and were included in the buyer side settlement costs for the purchase.

I am assuming we should add both because for one a) there is no clarity on the IRS instructions b) both were required and included in purchase, so it's a cost that was accrued to purchase property.

[Carl]

The only costs you can claim, are those that you actually paid. They are shown on the HUD-1 closing statement under the "Paid from borrower's funds at settlement" column. If you didn't pay it, you can't claim you did.

[anilj]

There is no HUD document. I am seeing posts saying that this was deprecated. 

[Carl]

Lenders can use the HUD-1 settlement statement until their supplies of that form are exhausted. It's been a number of years, and I'm only aware of a few lenders/closing agents still using it.

With the so-called "new" form, there is no set format for anything. only 'Guidance". It's as if they can just "make up" their own form out of thin air. Absolutely ridiculous. You may want to get with your lender in person, and have them clarify and explain the form to you. If enough borrowers would actually do this, that might be incentive for lenders to make their closing statements clearer.

[jkm88]

I paid for the Lender's Title Insurance as part of the closing cost - Do I capitalize this as part of my cost basis (depreciated over 27.5 years), or do I amortize the deduction through the life of the loan (30 years in this case)?

[DaveF1006]

Yes, Title insurance become additions to your basis in the property and part of your depreciation deduction. This is illustrated in the following IRS link. In fact you would make these separate assets entries as closing costs to be depreciated separately. 

[jkm88]

Thanks, @DaveF1006!

@anilj I am in the same camp as you.

The IRS publication 527 did not specifically break down the type of title insurance (Owner vs Lender) that can be added to the cost basis.  

Technically speaking, the Lender's title insurance is part of the lending process.  So I wonder why they included it as part of the cost basis instead of amortizing it.

Should be safe to include both Owner and title insurance as part of the cost basis right?

[Mike9241]

lenders' title insurance is included as title insurance and adds to basis. it is not currently deductible or amortizable.

[jkm88]

Thanks, @Mike9241! 

[User ID 4993393]

That same publication says below: 

"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."
      
      

   Lender's title insurance is REQUIRED by LENDER, as part of "getting the loan". No loan=no lender's title insurance required. From what I am reading this clearly says Lender's Title policy cannot be added to coast basis of rental property. There is another IRS publication (don't remember number) that has a sentence saying something like "the general rule is you can only add to cost basis those expense that you would have paid if you bought the property in cash." so nothing related to lender can be added to cost basis period. CAN YOU PLEASE CLARIFY WHY YOU THINK LENDER'S TITLE INSURANCE CAN BE ADDED TO COST BASIS? THANK YOU