Tenant wants to buy rental. Can I deduct the fees for the appraisal I had done?

[MaryK4]

Yes you can add them as sales expenses if you are currently selling the property, or as a rental expense if you did not sell in 2022.

[Carl]

@MaryK4 I differ on this. Per IRS Publication 527 Basically, page 7 says appraisal fees can't be added to the cost basis.

It indirectly says appraisal fees are deductible at settlement costs (closing costs, sales expenses) only if they are a requirement of the lender for loan approval. Typically, not something deductible by the seller.

Last item on page 7 of IRS Pub 527, item #3d.

They are also not deductible as a direct rental expense either. I've seen situations where a property insurer required a property appraisal as a condition of insuring the property. In that situation it would seem to me the appraisal cost is included in the insurance costs for that first year.

[MaryK4 · Accepted solution]

To clarify, in Publication 527, the appraisal fees are not added to the basis if REQUIRED BY A LENDER. (emphasis added).  Generally, appraisal fees will be deductible on your Schedule C or Schedule E if the appraisal is conducted for business reasons.  Getting an appraisal to know the current value in order to decide whether to keep or sell a property is an ordinary and necessary business expense since it would be foolish to just come up with a price randomly.  While you can use real estate agents' comps, you can also hire a consultant with specialized knowledge of valuations (this is an appraiser).  

If a taxpayer incurs transaction costs (including appraisal fees) while selling or disposing of property other than inventory, transaction costs are capitalized. Under the general rule, capitalized transaction costs are (1) in the year of sale, subtracted in arriving at the amount realized, or (2) in the year the sale is abandoned, deducted as a loss under Sec. 165, if permissible. Under an alternate rule, taxpayers add capitalized transaction costs to adjusted basis in situations involving securities, like-kind exchanges, and installment sales.

See 26 CFR § 1.263(a)-2.

[Carl]

Appraisal fees are not added to the cost basis. Appraisal fees are part of your loan acquisition fees *only* if an appraisal required by the lender. Typically they will be required by the lender as a condition of loan approval.

When selling property, the seller typically does not have any fees related to acquisition of the property, since they aren't acquiring anything - they're selling. But the seller could have fees associated with disposition of the property and such fees are typically included in the sales expenses incurred by the seller. (RE Agend commissions for example.) For fees associated with acquisition of the loan, that's on the buyer; not the seller.

For the buyer, fees associated with acquisition of the property are added to the cost basis of the property and, if business property they get depreciated over time. (rental property is business property in this aspect.)

For the buyer, fees associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan. For most, loan acquisition fees have to be entered as a separate asset, and entered correctly so they're amortized and deducted, instead of capitalized and depreciated. So if you check the assets/depreciation list (Form 4562 that prints in landscape format, titled "Depreciation and Amortization Report") and you don't see an entry for "Amortization", you need to enter your loan acquisition fees separately.

Again, the cost of a property survey is not generally added to the cost basis of the property. At least, I've never heard of a situation where it was. The survey cost is treated as a loan acquisition fee *IF* the survey was a requirement of the lender as a condition of loan approval.  If it wasn't a requirement of the lender, then it's flat out not claimed anywhere on the tax return.