Can I Deduct Appraisal Fee for my Investment Property? If so, does I have to amortized over the life of the loan?

[jbpatel5]

Hello All,

Can I Deduct an Appraisal Fee for an "Investment Property"? If so, does it have to be amortized over the life of the loan (30-yrs) or can I take the full deduction in the year it was paid?

Thank You!

[Anonymous]

why was the purpose of the appraised?   and what type of property?    

[jbpatel5]

I recently purchased an investment property and so as usual, the lender ordered an appraisal before approving me for the loan. It is an single family residential property. 

[Anonymous]

Amortizable Closing Costs
When you take out a mortgage, the IRS lets you write off your interest, but you will have to amortize your closing costs over the life of the loan. Closing costs like prepaid interest, loan origination fees and even "junk" charges like appraisal fees or documentation fees all get divided over the life of your loan. If you took out a 25-year amortization loan with a 10-year term and you spent $16,000 to do it, you would divide the $16,000 by 10 to find your yearly amortization allowance. You can then write off $1,600 per year during the life of your loan

here's a link to a discussion 

https://ttlc.intuit.com/community/credits-and-deductions/help/what-can-i-deduct-when-refinancing-ren...

many threads use "deductible".  what they don't clarify is whether they are immediately deductible or deductible over a specific period.

[Critter]

If this was part of the closing costs (which is normal) then all the cost to close are added to the total cost basis for depreciation purposes.  

[Carl]

Basically, any expenses incurred to secure the loan (not the property) are amortized and deducted over the life of the loan. This would be expenses paid for your credit check pull, appraisal fees *if* required by the bank in order to secure the loan (and it was), as well as what the bank calls "origination fees" which may or may not include "points" (which is nothing more than pre-paid interest on the loan.)

Whereas expenses incurred in acquistion of the property are capitalized and depreciated 27.5 years (for rental property). These would be expenses such as title transfer fees, title insurance and things like documentary stamps if your county still does that.

- Amortized expenses are "deducted" over the life of the loan.

- Capitalized expenses are "depreciated" over 27.5 years (as per the MACRS schedule for residential rental property.)

To help you out, if this is your first year reporting rental income/expenses on a tax return, the below information will clarify things for you, that (in my opinion) the program does not.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

[jbpatel5]

Thank you all for clarification. Really appreciate it

[Omar]

Where are the appraisal and other fees entered? In the New Rental Property Worksheet, under the Increases to Basis section part 2 - Settlement fees or closing costs, there's no entry that seems to apply for this kind of fees. Should the fees for the appraisal, credit report, etc. be added together and specified in the Other increases to basis box?

[sun2sirius]

I am making improvements (replace doors and windows) after the property was put into rental business (while being rented). Do I start depreciating the particular improvement from the moment it is put in service, not when the rental business started? Does each improvement have its own depreciation schedule as they are finished at different times?

What if I do an expensive remodel somewhere in the middle of 27.5 period, does it start its own 27.5 depreciation cycle that would go past the main building's depreciation period or all improvements just add to the cost basis, and all depreciation ends at the end of the 27.5 period of the main building? What if I keep using the property for rent past its 27.5 depreciation period?

Thanks!

[Cynthiad66]

Yes.  Depreciation starts when you place property in service..  Renovations are usually 27.5 years but appliances and other minor items have shorter lives.  So, the overall renovation will be given a useful life of 27.5years but you will need to take out cost for appliances because they have a shorter useful life.  TurboTax will walk you through entering your depreciable item.

In other words, you may need to separate items with shorter useful life like appliances.

In TurboTax Online, report rental income and expense:  

• Down the left side of the screen, click on Federal.
• At the top of the screen click on Wages & Income.
• Under Your income, scroll down to Rentals, royalties and Farm.  Click Show more to the right.
• Click Edit / Add to the right of Rental Properties and Royalties.
• At the screen Your 2020 rentals and royalties summary, click on Edit to the right of the rental activity.
• At the screen Here's rental property info, scroll down to Assets (Depreciation) and click Edit to the right of the rental property.

TurboTax will ask questions and guide you through entering your rental property information and computing a depreciation expense.

How Long Do You Depreciate Appliances?

1. Used and new appliances depreciate for up to 5 years.
2. The purchase price of depreciating appliances includes the sales tax, delivery charges and setup fees.
3. Rental property purchases do not qualify for section 179 accelerated depreciation

If you improve depreciable property, you must treat the improvement as separate depreciable property. Improvement means an addition to or partial replacement of property that is a betterment to the property, restores the property, or adapts it to a new or different use. See section 1.263(a)-3 of the regulations.

Link for more information:  How to Depreciate Property

Just as you depreciate the cost of rental property over time, you must also depreciate the cost of renovations, remodeling and improvements over time -- typically 27.5 years. However, certain appliances, such as stoves, refrigerators, and washers and dryers have a shorter expected life span, and therefore can be depreciated over a shorter time period. Depreciation is a form of tax deduction. Essentially, depreciation provides a way to account for the theoretical loss of value through fair use, wear and tear and obsolescence over time. You deduct the full cost of a rental house over 27.5 years.

Generally, renovations can be depreciated over the same time period as the property to which they're attached, so renovations to rental houses and apartment buildings have a 27.5 year depreciation 

@sun2sirius

For more information use this link:  Residential Rental Proert

[sun2sirius]

@Cynthiad66 , thanks for the quick response! I failed to mention that I have an LLC (started in 2021) and am  now working on Schedule E for my individual tax return. Since Schedule E is mostly just a copy of my LLC P&L report, I want to make sure that my QBO Advanced books are correct. Therefore it was *very* useful to see the previous response on Repair vs Investment. I do use TurboTax, but I probably won't go through your steps for rental income as this would go through the LLC and Schedule E. 

Since my current improvements were made only a few months after the rental property was put in service, I was thinking to calculate the 2021's depreciation on improvements for the days they were actually in service up to the end of 2021, and then these would basically go together with the main Building depreciation and end together with the building. It does not make sense to me to keep amortizing improvements after the building itself is fully amortized, but maybe I am incorrect.

Now that you mentioned appliances - I was going to expense all my rental property's appliances and furniture (below $2500), including tools I used to remodel that rental property, based on De Minimis Safe Harbor Election - is this not allowed for the rental property?

[DaveF1006]

Yes, you can expense appliances and furniture by using the de minimis Safe Harbor Election if these items are less than $2500.  Please read this IRS document regarding de minimis safe harbor election for further details.

@sun2sirius