Assignment Fee - Deductible or Need to Be Capitalized

14 Replies

So, we bought a distressed home and rehabbed it, now about to rent.  I understand the purchase and rehab cost have to be capitalized and minus land value, depreciated over 27.5 years.

My question is one of the assignment fee paid to the individual who got the property under the contract and brought us the deal.  The fee was paid entirely outside the transaction for purchase of the property.  So, I am wondering, can that assignment fee be counted as a cost of doing business and deducted in full for the year.  In other words, not count it as part as part of the capitalized cost?

Larry Fried, Real Estate Agent in OR (#201211636)

Contract ratified with signatures and a receipt is needed. 1099 assigned to the referrer,

@Larry Fried ,  I am sure you know this but just to understand your question, normally assignment fee for the wholesaler is included on the marked-up price that you paid on the house. So, the fee would already be in your cost basis. the marked up is an assignment fee.  

But when you paid someone separately wouldn't that be a commission?  In your case, did you pay someone a commission to find a house to you and they didn't act as a wholesaler as mentioned above so the transaction was outside the sale ? 

Originally posted by :

But when you paid someone separately wouldn't that be a commission?  In your case, did you pay someone a commission to find a house to you and they didn't act as a wholesaler as mentioned above so the transaction was outside the sale ? 

 The assignment fee was paid outside the sale transaction.  Entirely separate, but not a commission per se.

Larry Fried, Real Estate Agent in OR (#201211636)

Sounds like you can call it an expense and write it off now. It was essentially a commission the way you are describing it.

@Sam Shueh So, you are saying that we (a 2 person LLC) need to issue a 1099 to the referrer (another LLC) who we paid. The referrer is also our project manager, so there are other fees paid as well.

Larry Fried, Real Estate Agent in OR (#201211636)

@Larry Fried

Looks like this is a finder;s fee. 

Generally, that costs incurred in the acquisition of an asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of finder's/brokerage fees for the purchase of the property, as explicitly provided by longstanding Treasury regulation, Treas. Reg. 1.263(a)-2(e).

Anything over $600 paid to who ever, I always ask for their fica number and issue them a 1099.  Unless you want to absorb the cost.  I believe finder fee, expense call what you want I issue a 1099 and give me my CPA.  For that reason I try to settle it in the contract through escrow.

If you paid an assignment foee for a property you purchased, the assignment fee is part of your cost basis, not an expense.

Same as with an option to buy.  If you pay someone for an option to buy a property at a specified price, then later complete the purchase, your cost basis is the contract purchase price plus the cost of the option.

@Larry Fried

If the fee was specifically for this property, then it is not grey. It is black: part of the acquisition costs aka tax basis. Depreciated, not deducted. It does not matter if it was paid outside the closing. Some people would try to conceal it, hiding it under marketing or something like that. Such "creative reclassification" is basically cheating.

1099 is a separate issue. Yes, you should issue a 1099 for this. In your case, combine it with all other fees paid to your PM.

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