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Are closing costs on investment property tax deductible?

Posted on: 30th Mar, 2007 02:35 am
I am an investor looking to buy property to use it later for rent. I would be applying for a mortgage soon, but a little confused over the closing costs that one has to pay. I've heard one can deduct mortgage interest from the taxes one pays but are closing costs deductible? Any suggestions are appreciated.
Not all closing costs on a mortgage taken against rental property are deductible. Usually closing costs make up the categories given below:
  • Deducted as current expense:
    These costs are deductible as a rental expense in the year you purchase the property.

  • Amortized over loan period:
    There are closing costs which are deducted evenly over the total number of loan payments required at the beginning of the loan.

  • Costs added to the cost basis of the rental property:
    Some of the closing costs are added to the cost basis (purchase price) of the property. These costs are generally depreciated.
Posted on: 30th Mar, 2007 03:11 am
The closing costs paid for the mortgage on an investment property are treated differently for tax purposes.

I have listed below the gross amount of money paid by the borrower and how its different components are treated tax-wise.
  • Contract Sales price:
    This is the purchase price of the property which should be depreciated. Unless you are purchasing a condo, you should allocate a part of the purchase price to the land on which the house is built. Usually, one allocates 10% to 25% of the purchase price to the land.

    The cost allocated to the land may not be deducted or depreciated or amortized. The cost can vary depending upon the size and location on the property.

  • Personal property cost:
    This is the purchase price of any personal property included with the real property. Such a price is depreciated.

  • Settlement charge to borrower:
    This comprises of a list of costs on page 2 of the HUD-1 statement.
There are certain adjustments for the items which the seller usually pays in advance. These are:
  • City/town taxes:
    Such costs are allowed as current rental deduction.

  • County taxes:
    These are allowed as current rental deduction.

  • Assessments:
    These are a part of the rental deduction. However, if assessments are labeled as local improvement district assessments, they are not deductible and must be amortized over the loan term.
Posted on: 05th Apr, 2007 11:40 pm
A part of the closing costs include broker's commission and the fees which one pays for the items related to the loan.

As far as the taxes are concerned, the broker's commission is paid by the seller and thus requires no taxes to be paid by the buyer.

The loan related costs payable to the lender include:
  • Loan origination and discount points: Both these items payable for investment property must be amortized over the life of the loan. It means that one cannot consider current deduction on these items.

    Points are deducted as current deductions provided these are paid for the purchase of a primary home. But for a mortgage on investment property or a refinance of either primary home or investment property, the points paid should be deducted over the loan term.

  • Appraisal, credit report and lender's inspection fees: These costs should be added to the cost basis of the property and must be depreciated.

  • Mortgage Insurance application and assumption fee: The above items should be amortized over the entire loan term.
Posted on: 14th Apr, 2007 12:47 am
RE investment property appraisal

Should appraisal costs be depreciated even if paid up front on my credit card?
Posted on: 25th Jun, 2010 11:29 pm
Hi lmirwin,

You can claim tax deduction for depreciation on your investment property. But I don't think the appraisal costs can be depreciated since you've paid it upfront.
Posted on: 27th Jun, 2010 11:50 pm
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