Tax Questions - from the First Time Homebuyer

2 Replies

With tax season around, I'm sure there are others scrambling for answers to their tax benefits. I have interviewed a few tax accountants and have one in mind. But, I'm trying to arm myself with some tax knowledge so I can review his return.

Prior to buying a first home, we generally have expenses such as consulting a guru, attending RE conferences, buying education books or incurring plane/meal/hotel expenses to visit properties (assuming the trip was pre-planned with R/E business in mind).

In my case, I had those expenses, plus performed inspections of a property that I ended up not buying. But, a few months later, I did buy a place in the same city. 

I’m curious as to whether and how the expenses above can be expensed or capitalized. For reference, expensing = decreasing your passive income now to pay lower taxes now. Capitalizing = decreasing your passive income over time to pay lower taxes over time.

It seems the IRS categorizes expenses associated with acquisition of real property as (i) investigatory, (ii) facilitative, or (iii) incurred before placing the rental in service.

(i) Facilitative = Capitalized Expenses

Examples: Application Fees, finder fees, home inspections, broker/appraiser fees and others listed under 1.263(a)-1(d) - for those who want a comprehensive list

(ii) Investigatory are expenses to help determine "whether or which" properties to buy. They must NOT be facilitative expenses and can be expensed immediately.

(iii) Incurred before placing the rental in service. 

Examples: repainting walls, refinishing floors, etc. Things that are thought to normally be expensed because they seem repair costs, are instead added to the basis of the property if it was incurred prior to placing building.

Source: https://keitercpa.com/wp-content/uploads/2012/02/C...

Putting the above read to practice, would this be an appropriate conclusion?

1. Expenses for consulting, attending R/E and travel expenses such as plane, meal and lodging to check out a property, educational expenses can be immediately expensed. Meals can only be deducted at 50%, while the rest at 100%. (input in 1040 Schedule C)

2. Inspections performed for a property that I ended up not buying can be added to the basis of the property that I bought later in the year. This was a tricky one. I'm surprised that inspection costs for one property can be transferred as basis for another property.  After asking a few tax accountants and reading on BP, that seems to the conclusion. Anyone know why or can point to some rule?

@Alice He

Love it how you read about this. Your title says Frist time homebuyer. Are you referring to buying your personal residence?  If yes, nothing is deductible. 

1. Expenses for consulting, attending R/E and travel expenses such as plane, meal and lodging to check out a property, educational expenses can be immediately expensed. Meals can only be deducted at 50%, while the rest at 100%. (input in 1040 Schedule C)


If you were already in the business, then yes would be deductible, but since you hadn't bought anything yet.....

This is tricky. 

Expenses incurred in the course of a general search or a preliminary investigation of a new business are personal in nature and are not deductible by individual taxpayers (Rev. Ruls. 77-254, 79-346, and 71-191 - since you like to do your research). But, if there was an entity formed (Especially Corporation S- or C) before the general search, you have an argument to deduct them as business startup expense (See below)

A noncorporate taxpayer (individuals) not engaged in the business  can't deduct expenditures made in searching for or investigating a new venture. However, once a taxpayer has focused on the acquisition of a specific investment, unsuccessful expenses (your 2nd question) that are related to an attempt to acquire that investment are deductible as business or investment losses.

if there was an entity, since you incurred this before actually buying a property, at the best, these expenses would qualify as "Start-up cost" for the business. $5000 of these costs are deductible, remaining are deducted over 15 years.  you have to meet Startup cost requirements and stuff. 

Remember, the cost of actually acquiring the property are capitalized, they are not start-up cost.  

2. Inspections performed for a property that I ended up not buying can be added to the basis of the property that I bought later in the year. This was a tricky one. I'm surprised that inspection costs for one property can be transferred as basis for another property. After asking a few tax accountants and reading on BP, that seems to the conclusion. Anyone know why or can point to some rule?

For the smaller Investor, the money that you spent on the new property that you didn't end up buying would not be much. So CPA tends the just expense as a regular business expense or add to other property.

However, the correct treatment is to actually capitalize the amount, since the money spent after you identified the property has to be capitalized as it is the inherently facilitative cost(as you mentioned above). If the deal did not go through, than you would recover this as an abandonment loss. Eventually, the capitalized amount is expenses. It matters for the bigger deals when people put a bigger amount on the deal. 

However, for the small taxpayer, it really doesn't matter because the deal fall apart in the same tax year and the amount involved is small. 

Thanks for the comprehensive explanation, Ashish! Is my understanding below in line with your explanation? Wanted to provide a summary in case anyone in the future wants to refer to it as well.

For an individual:

1. Investigative (education, conferences, travel to check out a general area of properties) expenses before any rental properties purchased = cannot be deducted.

2. Acquisition expenses that can be pinpointed to a property before any properties in portfolio = capitalized. 

For an entity: 

1. Investigative (education, conferences, travel to check out a general area of properties) expenses before any rental properties purchased = if expenses qualify as start up costs, $5K expensed immediately and rest is deducted over 15 years.

2. Acquisition expenses that can be pinpointed to a property before any properties in portfolio = capitalized. (Same as for individuals)

Expenses on a new property that did not work out: 

Some CPAs immediately deduct and some capitalize cost to another property because those expenses are usually not large for small taxpayers. 

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