HUD-1, Taxes, and Capitalization: How to account for a new purchase at Tax Time

2 Replies

Each year, after I purchase a property, I have to re-look up how to treat the various items from the HUD-1 (closing statement) when preparing my Schedule E. I am NOT an accountant, but I did find this article by one EXTREMELY helpful.

It both explains the over-arching principals, and goes line-by-line down the HUD-1, specifically identifying whether the expense is a current expense (typically interest, insurance, property taxes), added to loan costs (e.g., points) , adjustment to cost basis (e.g., title, recording.), or neither (typically deposits/advances).

Enjoy! May your taxes be tiny :)

Updated over 3 years ago

I'm a finance guy, so capitalization = adjusting for your cost basis.

I know Keith Borg, he's a great real estate accountant.    I'm glad he's in my backyard!

I account for my properties on a cash basis. We created a new legal entity to purchase a small multi- family property. When we closed at the end of may, we received a credit on the HUD-1 for property taxes owed by the seller for Jan through May. My question is around how to account for this credit on the initial journal entry to set up the company and account for the property tax credit. If I book a credit for property taxes payable, it seems that this payable will not clear when I pay the full year taxes at the end of the year. My experience is in accrual based accounting, so I'm struggling with how to handle the property taxes on a cash basis. I would appreciate your thoughts.

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