Purchase cost relating to Loan

[Winston A.]

Hello,

I bought a building for $200,000, and was wondering if add the purchase cost to the building before OR after the allocated building % is applied.

VERSION #1
Purchase Price: $200,000
Purchase Costs: 5,000
Total: $205,000
Building % 75%
Building Basis: $153,750

VERION #2
Purchase Price: $200,000
Building % 75%
Total: $150,000
Purchase Costs: 5,000
Building Basis: $155,000

Thanks in advance for your help,

Winston

[Account Closed]

I agree with Steven that you add appropriate costs to the purchase price first before allocating costs between building and land. It is important though to review each of the items on a HUD-1 to determine if it should be added to the basis or not.

Publication 527 and 551 explains pretty well how to calculate the basis of a property and what should be included in the basis.

Costs incurred in getting a loan are not added to the basis of a property. This would include loan origination charges (points), appraisal fees, credit report, mortgage insurance premiums.

Settlement costs would be added to the basis. These include any abstract costs, legal fees, recording fees, title search, surveys, transfer taxes, title insurance and amounts that the seller owed but you pay as the buyer.

You also need to review any preacquisition costs like inspections which may need to be added to the basis as well.

It often takes a few minutes to review a HUD-1 to determine what can be expensed, what must be amortized (loan fees / points), what becomes part of the basis and what gets ignored (set asides for escrow as an example).