On what screen in turbo tax do i enter home inspection, pest inspection, and termite inspection for a rental property we purchased in 2015?

[Carl]

I found the following the other day, and am sharing it here. Basically what you're asking about should already be included in line 101 of your HUD-1 closing statement. But I am aware that no two lenders can seem to fill out the HUD-1 statement the same way. So use the below as a guide. Just understand that your fees for your inspections add to your cost basis of the property.

• Tax Deductible Closing Costs on an Investment Property

A big area of confusion comes when a real estate investor pays closing costs in connection with getting the mortgage on a rental property. Since closing costs can run anywhere from 1% to 5% of the loan value, they represent a significant cash outlay. However, not all of the closing costs are deductible as a current expense, and some are not deductible at all.

Closing costs on an investment property may fall into one of three tax categories:

• Deductible as a current expense – These amounts are deducible in full as a rental expense in the year the property is purchased
• Amortized over the life of the loan – These amounts must be deducted evenly over the total number of loan payments required at the beginning of the loan
• Added to the cost basis of the property – These amounts must be added to the cost basis (i.e. the purchase price) of the property and must be depreciated

Note: The tax treatment of the items below relate to a purchase of an investment property. The tax treatment of these items when paid in connection with the purchase of a principal residence is much different.

HUD-1 Statement Line-by-Line – Page 1

100. Gross Amount Due From Borrower

• 101. Contract sales price – This is the purchase price of the property and must be depreciated.
  
  TIP: Even if you are buying a condo, you must allocate part of this purchase price to the land that the house, building or condo sits on. The cost allocated to the land may not be deducted, depreciated or amortized. The amount that should be allocated to the land will vary based on the size and location of the property, but it is common practice to allocate 10% to 25% of the purchase price to the land.
• 102. Personal property – This is the purchase price of any personal property included with the property and must be depreciated.
• 103. Settlement charges to borrower (line 1400) – These are the total of the costs that appear on page two and are discussed below.

Adjustments for items paid by seller in advance

• 106. City/town taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 210
• 107. County taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 211
• 108. Assessments – These are allowed as a current rental deduction but must be reduced by any amount on Line 212. However, if the assessments are specifically labeled as local improvement district (LID) assessments, they are not currently deductible and must be amortized over the life of the loan.

200. Amounts Paid By Or In Behalf Of Borrower

• 201. Deposit or earnest money
• 202. Principal amount of new loan(s)
• 203. Existing loan(s) taken subject to

These amounts are all included in the purchase price on lines 101 and 102 above. The amounts on line 201, 202 and 203 do not get separately deducted or amortized, but the interest paid over the life of the mortgage is deductible when paid.

Adjustments for items unpaid by seller

• 210. City/town taxes
• 211. County taxes
• 212. Assessments

These amounts reduce any deductible amounts on lines 106, 107 and 108 above.

HUD-1 Statement Line-by-Line – Page 2

700. Total Sales/Broker’s Commission – This is paid by the seller and has no tax effect on the buyer.

800. Items Payable In Connection With Loan

• 801. Loan origination fee
• 802. Loan discount

• These items must be amortized over the life of the loan.

TIP: Many people think that these amounts (usually referred to as points) are a current tax deduction. However, the only time that points are allowed as a current deduction is if the points are paid in connection with the purchase of a primary residence. Points paid in connection with the purchase of an investment property or paid on a refinancing of a personal residence or an investment property must be amortized over the life of the loan.

• 803. Appraisal fee
• 804. Credit report
• 805. Lender’s inspection fee
• 806. Mortgage insurance application fee
• 807. Assumption fee

These items must be amortized over the life of the loan.

900. Items Required By Lender To Be Paid In Advance

• 901. Prorated interest – Deductible as a current rental expense.

• TIP: This amount will usually appear on Form 1098 that you will receive at the end of the year showing how much interest you paid during the year. However, not all lenders include this amount on the form so be sure to check with your lender to find out.
• 902. Mortgage insurance – Amortized over the period the payment covers, which is usually one year
• 903. Hazard insurance – Amortized over the period the payment covers, which is usually one year

1000. Reserves Deposited With Lender

• 1001. Hazard insurance.
• 1002. Mortgage insurance.
• 1003. City property taxes.
• 1004. County property taxes.
• 1005. Annual assessments

These amounts are deposited (escrowed) with the lender and are deductible when they are disbursed from escrow by the lender. These amounts paid from escrow should be reported on your Form 1098 at the end of the year.

1100. Title Charges

• 1101. Settlement or closing fee
• 1102. Abstract or title search
• 1103. Title examination
• 1104. Title insurance binder.
• 1105. Document preparation
• 1106. Notary fees
• 1107. Attorney’s fees
• 1108. Title insurance
• 1109. Lender’s coverage
• 1110. Owner’s coverage

All of these amounts are added to the cost basis of the property (line 101) and must be depreciated.

1200. Government Recording and Transfer Charges

• 1201. Recording fees
• 1202. City/county tax/stamps
• 1203. State tax/stamps

These amounts are added to the cost basis of the property (line 101) and must be depreciated.

1300. Additional Settlement Charges

• 1301. Survey
• 1302. Pest inspection

These amounts are added to the cost basis of the property (line 101) and must be depreciated.

There may be other miscellaneous closing costs that you may pay in connection with buying an investment property. While the tax treatment of these amounts may vary, the general rules of thumb are that the costs associated with operating the property (such as real estate taxes and insurance) are deductible as current expenses, the costs associated with obtaining the mortgage (such as lender fees and mortgage application fees) must be amortized over the life of the loan and the costs associated with purchasing the property (such as title charges and recording fees) must be added to the cost basis of the property and depreciated.

[ayaey5]

Thank you, this is super helpful! In turbotax, I'm having entering the loan cost basis for amortization on a rental property. Can someone walk me through the steps? When I entered my loan cost basis under "depreciation", for a $1600 loan cost basis, the annual depreciation should be 1600/30 = $53, right? However, turbotax calculated it as $4/year. Thank you.

[Carl]

For starters a loan is not capitalized. Not ever. But the loan fees can be amortized, which is entirely different from capitalization.
A capitalized asset is depreciated over time. Generally for rental property, it's depreciated over 27.5 years. Then when you sell or otherwise dispose of that property, all prior depreciation is recaptured and taxed in the year you sell or dispose of the property.
An amortized asset is deducted over time - not depreciated. Amortized costs are a bonafide deductions that are not recaptured. Generally, an intangible asset is amortized. An intangible asset is generally something you can not physically touch - such as loan origination fees. In most situations (rental property not being one of them) you can deduct a maximum of $5000 in the first year, and the remaining is amortized over 15 years.
If the program has not already entered something in the assets/depreciation section for your amortized intangible asset(s), you can enter it manually.
In the Assets/Depreciation section on the 'Your Property Assets" screen click the Add An Asset button.
Select Intangibles, Other Property and continue.
Select Amortizable Intangibles and continue.
Describe the asset. Something like "Loan Fees" will suffice.
Enter the amount.
Enter the closing date, which is the date you closed on the purchase. Then continue.
Seelct Purchased New, and indicate you used it 100% for business, then continue.
In the code section dropdown, select 163: Loan Fees and continue.
Useful life is 15 years, then continue.
If you want, on the summary screen click the details link to see the breakdown.
That does it.
Understand that the amount you claim here are amounts associated with the acquisition of the loan only, not the acquisition of the property.
Expenses incurred for loan acquisition are amortized as above.
Expenses incurred for the property acquisition are sales expenses.

[ayaey5]

Hi Thank you for the helpful response. Aren't loan fees amortized over the life of the loan (ie 30 years for a 30 year mortgage)?

[andyguy]

for line  "903. Hazard insurance – Amortized over the period the payment covers, which is usually one year."

According to the above statement, for a rental purchased  on 6/15/2018, I should  divide $600 harzard insurance (listed in closing) by 365 day  X 199 day (number of days from 6/15/2018 until 12/31/2019)= $327.12 .

Therefore I can deduct in my schE $327.12 for year 2018.

the remaining balance of $272.87 will be  deducted for 2019.

Is my calculation correct?

[DianeC958]

Yes, you are correct in your calculation for deducting the Hazard Insurance between 2018 and 2019.

@andyguy

[jkm88]

@carnold1978:  How did you enter yours?  Is that for a new rental property?

I assume you are referring to fees that are related to a newly acquired property.  I did mine by capitalizing it as part of the cost basis (depreciated over 27.5 years).  Under the section 'Other adjustments' - Increase vs Decrease.  I entered the cost of home/structural/termite inspection under the 'Increases' textbox.

@Carl: Thanks for the detailed insight.  Would be curious to hear your thoughts if my approach for the home/structural/termite inspection fees is correct?

[Carl]

@jkm88 the thread you posted in is more than three years old. When you have multiple people starting their issue by posting in an existing thread, it leads to confusion and the high, high probability that you will be provided incorrect information.

I did mine by capitalizing it as part of the cost basis (depreciated over 27.5 years).

Make sure you add it to the cost basis of the structure only, and not the land. Also, know what gets added to that cost basis, and what get amortized/deducted (not depreciated) over time.

-Those costs related to the acquisition of the property are added to the cost basis of the property and depreciated over time.

-Those costs related to acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan.

I do not recommend using the "increase/decrease to basis" page, only because I don't know for a fact that it increases the basis in the structure only. In my opinion (and we all know what opinions are like) you're better off adding it to the amount entered in the COST box on the screen that asks for cost, and cost of land. Then, since your cost of land will not change, the addition to the total cost will just be included as a part of the structure costs.

Also, inspections having to do with acquisition of the loan are an amortized costs. (I myself am not aware of any of these types of loan acquisition costs, but it's been a few years and laws have changed slowly over time.)