I am trying to calculate my depreciation amount. From what I read it is the purchase price + closing costs. Can I include the closing cost if it is paid by the seller?

[jennifervphan]

Closing costs were paid by the seller.

[tagteam]

See https://www.irs.gov/publications/p523#en_US_2022_publink100010751

You need to pay the costs in order to deduct them.

[jennifervphan]

Can you help me figure out what items I can include in the depreciation amount? Are the rows highlighted in green correct? $568,414.47? I can delete this image after.

[Opus 17]

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@jennifervphan wrote:

Can you help me figure out what items I can include in the depreciation amount? Are the rows highlighted in green correct? $568,414.47? I can delete this image after.

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The kinds of closing costs that are allowable as adjustments to basis are the costs you would have been required to pay even if you had paid in cash and not gotten a mortgage.  This can include a survey, county stamp tax for transferring the property, county fee for recording the deed, and so on.  They are listed in publication 523 on page 8.  

https://www.irs.gov/pub/irs-pdf/p523.pdf

More details about adjustments to basis are in publication 551.

https://www.irs.gov/forms-pubs/about-publication-551

As best I can tell:

Bank fees to NFM Lending and the Lender's title insurance are not allowed, because those costs are associated with the mortgage and you would not have paid them if you paid cash for the property.  I think the charge plus sales tax for the closing agent are probably allowable as "Legal fees (including fees for the title search and preparing the sales contract and deed)," as shown in Publication 523.  (Is there a second page to your closing statement?  Most counties charge some kind of transfer tax and recording fee.  Did you pay for a survey?  Did you pay for a title search?)

Furthermore, you must reduce your purchase price by the seller paid closing costs.  You didn't really buy the property for $565,000, you bought it for $548,050.  That's like checking out a $20 bottle of wine at the liquor store and the clerk hands you a $2 rebate, your cost is really $18.

[jennifervphan]

Wow, thank you for pointing out that I have to reduce the seller paid closing cost from the purchase price. My CPA didn't point that out so I wouldn't have known.

To answer your question: the closing statement only had 1 page but I did look through the buyers packet and find these other documents related to closing costs. Does this help? Can you help me figure out what closing costs to add to the $548,050 (purchase price + seller paid credit) and what the final depreciation amount should be? To be honest, I filed my taxes for 2021 and 2022 incorrectly and have to file an amendment so I want to get it right this time. Thank you in advance! 

[Opus 17]

I don't see anything else.  I would expect to see some county fees under section E.  For example, in New York State, where I last sold a house, the county charged $50 (I think) to record the deed, and they charged 0.25% of the property price to the seller and 0.5% to the buyer as a "transfer tax."  Maybe your location doesn't charge such taxes and fees.

If you paid for an attorney to represent you, or if you paid out of pocket (before the closing) for a survey to make sure the boundaries were clear, or if you paid before the closing for a title search to make sure the title was clean, those are allowable adjustments to basis even if they don't show up on your closing paperwork.  

[jennifervphan]

Got it, the property I purchased was in the state of WA but I live in NY now so maybe that's what is causing the confusion? To sum up the whole conversation, the depreciation amount would be:

Purchase price: 565,000

Seller paid closing credit: -16,950

Title - Settlement or Closing Fee to Endpoint Closing: 800
Title - Sales Tax for Closing or Settlement Fee to Endpoint: 84

Title - Sales Tax for Lenders Coverage to Endpoint: 87.47

Total depreciation cost basis amount:  $549,021.47

Is this right? Thanks!

[Opus 17]

I don't think you can include the sales tax for the lender's title insurance coverage because you can't include the lender's coverage itself. 

I only gave NY as an example, I don't know what other transfer fees might be charged in other states. I was just surprised there were no fees at all.  

[jennifervphan]

Got it, so the depreciation cost basis would be: $548,934, right?

Purchase price: 565,000

Seller paid closing credit: -16,950

Title - Settlement or Closing Fee to Endpoint Closing: 800
Title - Sales Tax for Closing or Settlement Fee to Endpoint: 84

[Carl]

Got it, so the depreciation cost basis would be: $548,934, right?

Not quite, as the value of the land is never depreciated. But that is the amount you enter in the "COST" box. Then you enter the value paid for the land in the "COST OF LAND" box. The program (not you) will subtract the cost of the land from your total cost, and that will be the amount to be depreciated over the next 27.5 years.

[Opus 17]

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@Carl wrote:

Got it, so the depreciation cost basis would be: $548,934, right?

Not quite, as the value of the land is never depreciated. But that is the amount you enter in the "COST" box. Then you enter the value paid for the land in the "COST OF LAND" box. The program (not you) will subtract the cost of the land from your total cost, and that will be the amount to be depreciated over the next 27.5 years.

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@jennifervphan 

I think it's unclear why you want to calculate  the cost basis.  If it because you are planning to sell the house, your figures are correct.

If you are placing the property in service as a rental property (or home office, or other business use) then Carl is correct that you have to allocate some of your basis to the value of the land.  You might get some tips on this from a real estate appraiser, your tax assessor's office, or a real estate professional in your area.   Your total cost basis is as you calculated, but only part of that is allocated to the house and subject to depreciation.  

[jennifervphan]

Yes, I will be using this number and multiplying it by the land to building ratio to calculate the depreciation cost. I was just having a hard time figuring out the number that's to be multiplied. Thank you everyone for your help!

[AmeliesUncle]

Opus is correct that the mortgage fees are not part of Basis.  However, because the property is being used as a rental for for business, the mortgage fees CAN be amortized over the life of the loan.  You would enter that as a separate "asset" for depreciation/amortization.

[jennifervphan]

Hello,

Can you please help me understand what items are "mortgage fees"? I was planning on amortizing the points I purchased ($10,805.63). Is there something else I am missing that I can amortize in a separate line item?

[Opus 17]

@jennifervphan 

@AmeliesUncle 

I want to go back and clarify some things.  The closing statement @jennifervphan provided is dated 2021. You might be preparing a 2022 tax return or you might be planning for 2023.  (Or did you place the home in service as a rental in 2021 and you are preparing a very late 2021 tax return?)

When was, or will, the property be placed in service as a rental? Was it used as your personal home before it was placed in service as a rental?

If we consider the mortgage points only, separate from any other fees, the points may be deductible on your personal schedule A as an itemized deduction in 2021, the year of the home purchase. Or, they might be amortized over the life of the mortgage. If you deducted the points in full on your 2021 schedule A, then you can’t deduct them again as a rental expense in 2022 or 2023. 

If we consider other fees, like the bank processing fees and the bank (lenders) title insurance, my question for @AmeliesUncle  is, are those fees allocable to the rental property on schedule E if the home was used as a personal home before being placed in service as a rental?

So before we go into too much more detail into which fees are includable as basis, and which fees might be property expenses on schedule E, I would like to clarify the timeline.