Tax write offs

General Real Estate Investing
1

What are some of the tax write offs in a newly acquired property. Can attorney fee, appraisal fee, inspection be include?

2

Generally, no. Everything you mentioned is an adjustment to basis that will be recovered when you sell the property at a profit.

If you are buying as your first or second home, you can take deductions for home mortgage intereet and for property taxes, but only if you itemize.

If you use the property as a rental, you can expense almost all of your direct costs of ownership and rental operation, and, as a bonus, you can take a depreciation expense.

3

Thanks Dave.

It is a 4 unit property that is rented out. So the things I listed are not considered part of the ownership?

4

Not in the context of rental property deductions. You can generally deduct all money spent on your property AFTER you have put it in service as a rental.

Ownership costs are the costs you would still have if you did not use the property as a rental. Operating costs are those costs you incur because you are using the property as a rental. Property taxes, hazard insurance, legal fees, management fees, HOA fees, PMI, mortgage interest, HOA dues, advertising, utilities, lawn service, pest control, trash removal, repairs and maintenance, and any supplies you provide (light bulbs, for example) your tenants are examples of ownership and rental operation costs that are deductible from rental income.

Money you spend to acquire the property is included in the cost of the property. So the appraisal fee, attorney fee, and inspection fee are all
added to your purchase price and become the cost basis (tax basis) for the property.

5

Try to maximize your depreciation deductions:

  1. Only the structure and the land improvements are depreciable (not the land itself). Therefore, you want the proration of the basis to the land to be as small as possible. You can usually do better than the split provided by the tax assessor. An appraiser can do the computation in a couple of different ways, and you can use the most favorable result.

  2. Depreciate personal property and land improvements on an accelerated basis. Personal property (5-year depreciation) includes appliances (can be alot of these in a 4-plex), window treatments, carpeting, etc. Land improvements (15-year property) include landscaping around the building, driveway, walkway, and fencing. Document how you came up with the values you assign to personal property and land improvements.

Those closing fees you mentioned become part of the depreciable basis of the property.

Your travel expenses (primarily the per/mile rate for your car) in looking for new properties in the area/region where you already own property are deductible. You can also set up a home office as a discrete area in your personal residence, and claim a prorata share of house expenses, and some depreciation there too. Read up on IRS requirements for a home office first.

6

from the settlement statement, you can deduct:

interest - although this will usually be included on the 1098
interim interest - usually on 1098 also
insurance premiums paid - but not escrows
taxes paid - but not escrows

escrows should go into an asset account (think “savings”) and are not included in the basis.

you should also watch for the credit from the seller for the seller’s portion of property taxes. these get subtracted from what you pay at year end and are not deductible. Technically you were reimbursed for the seller’s part and so you didn’t “pay” the tax.

all the other junk fees, appraisals, etc are part of the basis.

then allocate your basis as per d1bears’s #1 & #2 and depreciate.

7

Just to add to Mark’s response,

Since this is a multi-unit property and you will also occupy one of the units as your primary residence, you have to prorate all the items in the above list between your investment units and your residence unit. The expenses allocated to the investment rental units are deducted on Schedule E. The portion of the property tax and mortgage interest allocated to your residence unit can be deducted on Schedule A, but only if you itemize.

You can not deduct hazard insurance premiums on your personal residence unit, even if you itemize.