Rental Property Closing Costs and Tax Deduction

Rental Property Closing Costs and Tax Deduction.

Unlike the main home scenario, in which one can deduct entire “points” amount paid towards getting a mortgage from their tax return in the year when the home was purchased, points amount paid cannot be directly deducted for rental property.

In case of rental property the “points” need to be amortized. I.e. : you have to deduct the points over the period of the loan. So for example : if you pay $3600 towards points for a 30 year fixed mortgage, you can claim (number of payments for the given tax year) * (3600/360) as the deduction amount. Related IRS information is here

Other closing costs (see below) should be added to the cost basis of the rental property and claimed as part of the depreciation.

Recording Fees
Legal Fees
Surveys
Title Insurance

Please be extra careful in determining the cost basis of the rental property as once you determine this you should not change the amount year over year (unless you do improvements to the property). The cost basis will determine by how much amount you can depreciate your rental property every year. Also, a point to note is that “Land” cost is not depreciable, hence you will have to deduct the land cost from the house purchase price. You can get the land cost from your city/county real estate records.

In a nutshell, points cannot be deducted as a whole in the first year when the rental property was purchased, they have to amortized over the period of the loan.

Most of the other closing costs can be added to the cost basis of the rental property and therefore can be claimed as depreciation every year.

Land cannot be depreciated.

For further details, please refer to IRS publication 527 (search for Cost Basis under depreciation)

This entry was posted on 24 Jan 2008 at 23:11 and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.