Tax time: what is deductible?

Question

Topical question: I have closed on a number of properties this past year, and I have refinanced one, so my question is very simple:

Which closing costs are tax deductible?

Thank you,

Steven Hamilton II · Answer

Consult with an accountant and provide your closing documents. You will receive a lot of incorrect answers in a forum such as this.

Basit Siddiqi · Answer

@Tarik Nabi

Closing costs normally are put into 3 different buckets.1) Currently deductible2) added to basis3) Added to escrow balanceItems that are currently deductible are items like prorated real estate taxes or insurance

Items that are added to basis are title fees, appraisals

items that are added to escrow are taxes + insurance that are collected at closing for 1-3 month periods until you are required to make a mortgage payment.

Michael Plaks · Answer

@Tarik Nabi

I assume you're talking about rentals. With flips, the answer would be completely different.

The only deductible costs from closing are those that would be deductible in the course of operating this property, usually these 3:

• taxes
• insurance
• HOA fees

Unfortunately, it's not that simple. For example, taxes are only deductible for the part of the year you own the property, so you have to adjust for tax pro-rations, and you cannot deduct any back taxes. Regular HOA fees are deductible, but not HOA transfer fees. And so on - there's a lot more.

This is why I will side with my colleagues who suggested you consult with someone like us and learn the process. That is - if you plan to handle this yourself in the future. With multiple properties, it'll probably cost you more to try DIY tax preparation than hire professional help, but it's your call.

Refinance brings another complication: you're allowed to deduct loan costs from the original financing, but for this purpose you need to properly calculate them on the initial closing. And yes, it is also tricky, so yet another reason to get expert help.

Tax time: what is deductible?

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