Which Items on Closing Disclosure should be part of Cost Basis?

[Anonymous]

I'm trying to figure out what on my closing disclosure are part of the cost basis of my property. According to IRS, the following items should be included. I'd like to have a second opinion on which items on my closing disclosures match with them:

• Sales tax.

• Freight.

• Installation and testing.

• Excise taxes.

• Legal and accounting fees (when they must be capitalized).

• Revenue stamps.

• Recording fees.

• Real estate taxes (if assumed for the seller).

What appear on my closing disclosures that are paid by me include:

A - Origination Charges

A1 - 1% of Loan Amount (Points)

A2 - Processing Fee to Lender

A3- Underwriting Fee to Lender

B - Service Borrowers Did Not Shop For:

B1 - Appraisal Fee to valuation service

B2 - Attorney Fee to law firm

B3 - Credit Report Fee

B5 - Title - E-Recording Fee to title company

B6 - Title - Escrow/Settlement/Closing Fee to title company

B7 - Title - Insurance Endorsements to title company

B8 - Title - Mortgagee's Title Policy to title company

B10 - Title - Texas Guaranty Fee to title company

E - Texas and Other Government Fees

E1 - Recording fees (Deed, Mortgage)

F - Prepaids

F1 - Homeowner's Insurance Premium

F3 - Prepaid Interest

G - Initial Escrow Payment at Closing

G1 - Homeowner's Insurance

G3 - Property Taxes

I wonder if the cost basis would only include the sale price plus the B2, B5 and E1 above. Thanks for your help!

[leeloo]

There is no second opinion to what the IRS says. They make the rules.

Pub 530 says this:

Settlement or closing costs.

 

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.

The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home.

Items added to basis.

 

You can include in your basis the settlement fees and closing costs you paid for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

The following are some of the settlement fees and closing costs that you can include in the original basis of your home.

• Abstract fees (abstract of title fees).

• Charges for installing utility services.

• Legal fees (including fees for the title search and preparation of the sales contract and deed).

• Recording fees.

• Surveys.

• Transfer or stamp taxes.

• Owner's title insurance.

• Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions.

If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement.

Items not added to basis and not deductible.

 

Here are some settlement and closing costs that you can't deduct or add to your basis.

1. Fire insurance premiums.

2. Charges for using utilities or other services related to occupancy of the home before closing.

3. Rent for occupying the home before closing.

4. Charges connected with getting or refinancing a mortgage loan, such as:

   1. Loan assumption fees,

   2. Cost of a credit report, and

   3. Fee for an appraisal required by a lender.

Points paid by seller.

 

If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home

[Anonymous]

Thank you for your reply! What I meant by "second opinion" is actually asking what specific items on my closing disclosure are part of the cost basis defined by IRS since I'm uncertain. I think items B2, B5 and E1 should be part of the cost basis. I wonder if my understanding is correct and if there are any other items I listed above (items I paid for on the closing disclosure) that should be part of the cost basis. 

[leeloo]

Unfortunately, just because you pay a certain settlemnt cost, that does not mean it is added to the basis. Settlement costs on the purchase and closing costs on the sale are different. Look on your purchase statement for those costs and on your sales document for the ones listed below.

Sales Expenses for selling your property include:

• Sales commissions
• Advertising Expenses
• Legal Fees
• Broker Fees
• Transfer taxes

[Anonymous]

Thank you! I'm trying to calculate the cost basis for the house I bought, I haven't sold any. If I understand correctly, speaking of just closing disclosure, the cost basis would solely be based on the sale price (here I'm only talking about the elements in the closing disclosure, I know there are other things like improvements I did later to get the house rental ready could be counted as cost basis)? The other costs on the closing disclosure can't be included as cost basis? 

[leeloo]

@Anonymous

No, not everything listed is a settlement cost. Here are the things specicially mentioned by the IRS:

Settlement costs. Your basis includes the settlement fees and closing costs for buying property. You cannot include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash. The following items are some of the settlement fees or closing costs you can include in the basis of your property. Abstract fees (abstract of title fees). Charges for installing utility services. Legal fees (including title search and preparation of the sales contract and deed). Recording fees. Surveys. Transfer taxes. Owner's title insurance. Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

[Anonymous · Accepted solution]

Thank you Leeloo

After consulting a CPA, I confirmed that in my case, everything under "B - Service Borrowers Did Not Shop For:" and "E - Texas and Other Government Fees" can be added to cost basis. The "A - Origination Charges" can be amortized. 

This case can be closed 🙂