Ok, I had to file and extension on my taxes, and I used this new CPA from H&R Block. She does everything by the book. Well we bought 2 properties in 2011 and she is saying that any closing costs gets added to the purchase price, so it has to be depreciated over 29.5 years… This is the first time I have heard anything like this. And she said that the appraisal that the bank requires cannot be listed as a business expense. Anyone else heard of anything like this?? Please help me quickly.
Your first mistake was going to H & R Block. You must be new to the real estate business.
Ok, thx for that information… sure helped out a lot. Appreciate it.
There’s nothing wrong with Block. Heck, I get a lot of business fixing their mistakes.
However, this time Block is correct. The appraisal as part of closing costs is added to basis.
If you were to order an appraisal the next day on your own, it would be a business expense. So the lesson here? If the bank will agree to accept it, order the appraisal and pay for it outside of closing. Presto-chango insta-deduction.
Pretty much everything on the closing settlement statement is added to basis except:
- Interest. This is deducted as a business expense. The exception is interim interest during construction, but I don’t think this applies here
- prorated taxes. This could be a expense or a gain, depending on who paid what at closing
[li] loan origination fees. These should be broken out and amortized over the life of the loan. If/when you refinance you can deduct any remaining un-amortized origination fees in that year.
You also need to make sure that you break out the cost of the land and do not depreciate the land value. I usually hop online at the appraisal district and get the %land/%buildings and then apply that % to the final purchase price. It may or may not be 100% accurate, but at least you have something to show the IRS for a reason.
Sometimes I think I give too much info away for free…
I read your posts because you are the real deal and know what you’re talking about. Your info. is worth a lot more than free.
I’m still working on taxes so those closing expenses applied to me as well. Had to file an extension this year.
H&R Block is retail tax preparation. If you are in business you should always use investment grade professionals. That includes not only realtors, appraiser, and inspectors but also CPAs. I suggest as soon as you even think about getting into real estate start using a real estate investor grad CPA. Even if you only have one little rent house get a CPA. He needs to start getting used to your finances because when you are cranking ½ million dollars a year you don’t want to be scrambling to find a CPA then and have him forensically try to piece together your financial profile at that time. The cost to prepare your taxes won’t be that much more than using retail tax preparation but you will get a better job. You also get some advice about how to structure your personal finances to avoid headaches in your investment work later on.
Bluemoon is exactly right. We hired first a bookkeeper and then a budget CPA who farmed everything out to underlings.
The accounting codes for the various properties turned out to be non-sensical junk. That’s when we finally had to do that forensic accounting and put account numbers into use that made sense.
A tip for accounting: Number your properties.
Our studios: 005, 010, 015, etc.
1-bedrooms: 105, 110, 115, etc.
2-bedrooms: 205, 210, 215, etc.
Our accountant doesn’t care about the address. Now she has the same number on that house as we have in our accounting. When the house is sold, re-financed or whatever we don’t have to explain which house it is.
You pays now, or you pays later. Get your accounting in order NOW.