How to Account for Closing Costs?

Question

I just bought my first rental house, and I am not sure how to account for expenses for first year accounting.  I understand how expenses are calculated for 2nd year.  I have been researching and have read mixed results.  Not sure if these are depreciated or amortized over the life of the 30 year loan?

Specifically, how do I account for the following:

-Lender Fees (flat rate/no points)

-Appraisal

-Title Company Fees & Title Policies

-Taxes and Government Fees

-City and County Taxes

-Wire Fees

-Initial funding of escrow account for taxes/insurance

Thanks!

Basit Siddiqi · Answer

@Andrew McAfeeSometimes home insurance is also paid at closing. That should be currently expensed.

Michael Plaks · Answer

@Andrew McAfee

• Everything specifically linked to obtaining the loan is amortized. From your list, it's lender fees and appraisal.  
• @Brian Schmelzlen explained the escrow. 
• city /county taxes are a deduction for your portion of the year 
• the rest is capitalized and depreciated

That said, it's still best to run it by a competent REI accountant. There're too many opportunities to shoot yourself in the foot while processing closing statements.

Brian Schmelzlen · Answer

Hi @Andrew McAfee,

You will probably want to meet with your CPA (or hire one if you don't have one) to discuss this and other tax issues related to your new rental business.

Most of those expenses end up being capitalized (added to your property basis).  You would then allocate your property basis between the land and building, and depreciate the building costs over 27.5 years.

The city and county taxes, if they are property taxes and not any sort of transfer fee, are immediately deductible.

The funding of the escrow account is a non-event for tax purposes.  It is essentially the same as putting money into your own bank account.  You will be able to deduct the taxes and insurance as it is paid.

Hope this helps.

Susanita VanGood · Answer

I am trying to figure out how I apply the closing costs paid by the seller on a rental property. Do I allocate the credit proportionally to loan fees (amortize 5 years) and other closing costs/basis (amortize over 27.5 years) or can I select one or the other? I assume I need to record the escrow so that doesn't leave much left to amortize:

Escrow $2,399 (prepaid property tax/insurance)

Loan Fees $1,576 (origination fee, credit report, flood cert, doc fees)

Other closing costs (title fee, etc) $3,996

Total $7,971

Seller pd $5,000 of closing costs, where do I apply it for tax purposes?

Net $2,971

I assume I want to record the escrow at $2,399 so that only leaves $572. Can I choose whether that amount is classified as loan fees to be amortized over the loan period (5 years) or do I need to include it in basis/other closing costs (27.5 years)?

Thanks.

Andrew McAfee · Answer

Thank you @Brian Schmelzlen and @Anthony Dooley

This helped me categorize my closing costs.

Anthony Dooley · Answer

Your acquisition costs are on your settlement statement, previously called the HUD-1. Any repairs, management costs, taxes, etc are tax deductions. Keep good records on each property individually.

How to Account for Closing Costs?

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