Investment house property taxes

2 Replies

Originally posted by @Ruchi Patel :

We are in the process of purchasing a investment 2 family house. I would like to know what can be deducted or depreciated from the closing costs expenses ?

Generally, 

The following items are some of the settlement fees or closing costs you can include in the basis of your property and depreciate. 

  • Abstract fees (abstract of title fees).
  • Charges for installing utility services.
  • Legal fees (including title search and preparationof the sales contract and deed).
  • Recording fees.
  • Surveys.
  • Transfer taxes (can also be deducted) 
  • Owner's title insurance.
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs,
  • and salescommissions.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance- they cannot be added to the basis. These gets deducted as operational cost in the year of the purchase. 

If there were other costs incurred to acquire the house such as if you spend money for tax advice, tickets to fly to look at the house( or milage) and such also gets added to the basis

The following items are some settlement fees and closing costs you cannot include in the basis of the property.

1. Casualty insurance premiums.

2. Rent for occupancy of the property before closing.

3. Charges for utilities or other services related to occupancy of the property before closing.

4. You cannot include in your basis the fees and costs of getting a loan on a property.

The following are examples of these charges.

  • a. Points (discount points, loan origination fees).
  • b. Mortgage insurance premiums.:
  • c. Loan assumption fees.
  • d. Cost of a credit report.
  • e. Fees for an appraisal required by a lender.

5. Fees for refinancing a mortgage.

For your rental property items (1) through (3) are deductible as business expenses in the year you incurred them.

Items (4) and (5) are loan cost and must be capitalized as costs of getting a loan and can be deducted over the period of the loan.

Hi Ruchi! 

Here is a link to a section of the IRS website that should help with your question. 

https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expenses

Essentially only interest, mortgage points, and real estate taxes can be taken as a deduction in the year you purchase the rental property (provided the rental is placed in service). The rest of the expenses will be part of the basis of the property and depreciated over 27.5 years (for residential rentals) along with the part of the purchase price that is allocated to the building. 

Hope this help! 

-Ryan