When adding closing costs to the basis, should it be split between land and building? similarly, are soft-costs incurred before renting allocated btwn land and building?

[Anonymous]

yes to the first.   

as to soft costs neither if this is what you mean:

minor or incidental repairs to get a rental property ready to rent
outside office expenses paid for before a rental business begins, such as office rent, telephone service, utilities, office supplies, and office equipment rental
home office expenses
the cost of investigating what it will take to create a successful rental business, including research on potential real estate markets
attending real estate seminars or conferences or other educational programs or classes
insurance premiums (but not title insurance)
maintenance costs for a rental property paid for before the property is offered for rent—for example, landscaping and utilities (but not the cost of connecting utilities)
costs for recruiting and training employees before the business opens—for example, hiring and training an apartment manager
fees paid to a market research firm to analyze the demographics, traffic patterns, and general economic conditions of a neighborhood
business licenses, permits, and other fees, and
fees paid to lawyers, accountants, consultants, and others for professional services; however, legal and other fees

these are start up expenses which are subject to the rules of IRC section 195

(A)the taxpayer shall be allowed a deduction for the taxable year in which the active trade or business begins in an amount equal to the lesser of—

(i) 

the amount of start-up expenditures with respect to the active trade or business, or

(ii)

$5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, and

(B)

the remainder of such start-up expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins.

[Carl]

When it comes to closing costs, some folks don't quite understand what closing costs are composed of. There's two basic types.

 - Expenses incurred in securing the mortgage loan are amortized and deducted over time. For example, loan origination fees.

 - Expenses incurred in securing the property are capitalized and depreciated over time. That's the same as saying they are added to the cost basis of the property and applied to the structure cost. You can't apply them to the land cost, since land is not a depreciable asset anyway.  An example of this type of expense would be title transfer fees.

Generally, expenses incurred to "prepare the property for rent" are not deductible. Period. This does *not* include expenses that may be incurred during vacant periods between renters however. These type of expenses should not be confused with property improvements either. That's a completely different thing. Here's the gist:

• 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 PROPERTY 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.

[darren-arithoppa]

Thank you for the responses, very helpful.  for the second part of the questions, I am referring to expenses such as tax and insurance paid while the rental was being renovated before it was placed in service.  it looks like these would be startup costs.  thanks again.