Can I add acquisition financing cost to cost basis for rental propert converted from personal residence

[Jason612]

I purchased the house on Nov 2021. I paid $2300 for point, $2700 for broker fee, and $900 for appraisal. After a year occupied by myself, I converted it for rental property on Nov 2022.

My question is can I add these financing cost to cost basis for depreciation? There’s no space to put these information on TurboTax.

[MinhT1]

The broker's commissions can be added to your cost basis. There is no separate item to enter in TurboTax. You just add it to the cost basis and enter the increased cost basis in TurboTax.

The points and the appraisal fee are charges connected with getting a loan and cannot be included in your cost basis.

Please read this IRS publication for more information.

[Jason612]

Thank you for replying. So any charges connected with getting a loan cannot be included in the cost basis? 
Sorry for the misdescription. The broker commission is the loan broker commission, so it cannot be included in the cost basis?

Just wondering I refinanced another rental property which purchased with all cash, but everything connected with getting the loan was able to be added to the cost basis.

[MinhT1]

So the loan broker's commissions cannot be added to the cost basis.

But these costs linked to a loan for a rental property can be capitalized and deducted as rental expenses over the life of the loan.

The IRS says in Publication 551 that I quoted earlier:

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. 

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

b. Mortgage insurance premiums. 

c. Loan assumption fees. 

d. Cost of a credit report. 

e. 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. 

[Jason612]

Even though the property was primary residence in the first year, and converted to a rental property in the second year, the fees connected to getting a loan when purchasing the property cannot be deducted over the period of the loan.

If the property was rental property in the first year, the fees connected to getting a loan can be deducted over the period of the loan.

Is that right?

[Vanessa A]

Yes, as @MinhT1 stated above that is correct.  If the property was a rental to start, then the loan fees can be amortized over the life of the loan, (ex. $6,000 in fees could be deducted over 30 years at $200 per year if it was a 30 year mortgage with $6,000 in loan fees).

 But if it is a home to start with, loan fees are considered a personal expense and cannot be deducted at all. 

[Carl]

Costs associated with acquisition of the property are added to the cost basis of the property and depreciated over time. Examples of such costs would be the title transfer fees paid at the courthouse to remove the seller's name from the title and replace it with the buyer's name.

Costs associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan. Expamples would include loan application fees as well as property survey fees provided a property survey was a requirement by the lender of loan approval.

Typically, loan acquisition costs (namely, points) paid at the closing on non-business property (your primary residence) are fully deductible in the year of purchase as a SCH A itemized deduction and can not be claimed again when you convert the property to a rental or any other type of business use. However, if you took the standard deduction in that year, (which is most likely) then you can claim your loan acquisition costs and amortize/deduct them over the life of the loan.