I have two questions regarding the Income tax Return.
First one is about the refinance closing cost. I refinance my rental property last year and I was wondering how much of the closing cost can I deduct. Can I deduct all of them to the penny or is there only few items I can deduct like originationn fees , appraisal…
Second question is about depretiation. How value do you use to calculate your depretiation. Do you use the value of the home (house only, not the land) when you bought it and carry the depratiation amount every year until the cumulated reach your cost or do you take the new value for that year to do the calculation ?
example: house value was 100k, so 2004 depretiation was $100k/27.5=$3636. Should I carry $3636 for 2005 also or since the home is worth now $110,000, should my depretiation be now $110k/27.5= $4000 ?
Points and interim interest can usually be deducted as interest on Sch A. These usually appear on your 1098. The remainder of the expenses can usually be added to the cost of the property.
Depreciation is based on the purchase price (including any adjustments as above) and doesn’t change for increases/decreases in current value.
You can deduct the full amount of points in the year paid if you meet the following tests:
the loan is secured by your main home.
you are a cash basis taxpayer
funds you provided at closing are at least as much as the points. this includes down payment, escrows, etc.
the amount appears on the hud-1 as “points”.
points are calculated as a % of the loan amt.
Tom: most refi’s these days are “no cash” closings, violating #3. In this case, since it’s a rental, you miss on #1 also unless your main home is being used as collateral. You should amortize the points over the life of the mortgage.
aa - Investment interest does not include qualified home mortgage interest or any interest taken into account in computing inome or loss from a passive activity.
Generally, your deduction for investment interest expense is limited to the amount of your net investment income. You can carry over disallowed investment interest to the next tax year.
I have a tax question. On a single family rental property, is vacancy periods deducted as holding costs (i.e., mortgage, utilities, and maintenance)? And, where would this be reported on the 1040?
The short answer is “yes”, but not on a line called “holding costs”.
You’re running a business. Businesses have expenses like utilities, mortgage interest and maintenance. Many of these expenses continue whether you have a tenant or not.
So, even if there was no revenue for a few months due to the lack of a tenant, the business expenses are still fully deductible.
However, there will be no distinction between those expenses incurred during the period when you had no tenant. Utilities are utilities all year long.
Your basic question has already been answered – your depreciation basis is your cost basis at purchase. What noone has addressed, however, is the computation of your depreciation expense.
If you purchased the property in July, did some minor repairs to make the property ready for rental, then began advertising the property for tenants in August, you don’t get a full year of depreciation expense. You prorate the first year by a specific rule. The IRS has a publication called Publication 946, How To Depreciate Property, that you should download from their website. Table A-6 will tell you exactly what your first year depreciation percentage will be for the month you put the property in service as a rental.