# taxes

My other question was about how to calculate profit from an investment. My deal is as follows. The mortgage on the property is 140,000. I paid 6000 in closing costs,1200 in loan origination fee,2000 to repair property,and 6000 in Realtor fees. So the total expense in the property is 15200. If the property sold for 175000 then 175000-140000=35000. Then 35000-15200=19800. The 19800 is the profit number the tax man will use for capital gains tax. Does this look right? I live in Oregon. I talked to my tax preparer but I don’t think he really understands capital gains tax on investments.Who else should I talk to? Thanks

If your tax preparer can’t handle that, you need to find a another person to help you. This is very basic tax stuff.

Thanks for the response. Obviously I will talk to as many people as I can, but the question remains:are my numbers tallyed properly? For example it could be tallyed like this:140000 purchase price +repairs+realtor fees+out of pocket closing costs+loan origination fee=15000. So the actual cost of the home was140000+15000=155000. Therefore if it sold for 175000 then actual profit is 20000. Then we are taxed for capital gains on 20000. There are many ways to calculate short-term capital gains( I have 3 different people tell me 3 different things. With this amount it is probably not a big deal but I am sure I am not the only who wants to know EXACTLY how it is done. Thanks again.

Your question has several components involved in the answer. Let’s start with the simple ones. Your purchase price was \$140K and your repair costs were \$2K, so it would appear that your cost basis in this property is \$142K just from these cost components.

Your projected sale price is \$175K with an inexpensive real estate commission (3% would be \$5250, 6% would be \$10,500, but we will use your number) of \$6K. I guess you are assuming that you will have no other selling expenses, or seller concessions, so your net proceeds will be \$169K.

Normally, you calculate your taxable profit by subtracting your cost basis from your net sale proceeds. Doing so right now will give you a profit of \$27K (\$169K minus \$142K). However we have not considered the impact of your closing costs upon your cost basis when you purchased the property.

This is the hard part and it will take a little research on your part to arrive at the correct number. Some of your so called “closing costs” are adjustments to the basis, while others are deductible expenses in the year of acquisition, while yet others are capital expenses to be amortized over the life of the loan.

For the sake of illustration, let’s say that your \$6K in settlement costs included some amount for prorated property taxes and included some amount for interim interest on your financing. Let’s just say that all these amounts add up to \$3K which you deducted on your personal tax return for the year in which you purchased the property. This leaves you \$3K to add to your cost basis. Adding another \$3K to your cost basis makes your sale profit \$24K.

If you did not take any of these allowed “closing cost” deductions, but instead elected to treat everything as an adjustment to basis, then the entire \$6K adjustment reduces your sale profit to \$21K.

The loan origination fee is a capital expense which you can choose to add to your cost basis, or you can choose to amortize it over the life of the loan (not the property).

If your investment property is a residential rental property, you can deduct closing costs for mortgage interest and deductible real estate taxes on Schedule E. Additionally, PMI premium (if any) paid at settlement is also expensed on Schedule E, line 9 (write in PMI on the dotted line). All other settlement fees and closing costs for buying the property are treated as additions to your basis in the property.

Fees related to obtaining a loan are capital expenses and should be amortized over the life of the loan. These fees are not really closing costs but are often lumped into the general category of closing costs because they are collected at closing. These expenses can include loan origination fees, title abstract fees, and mortgage recording fees. You calculate the amortization over the life of the mortgage on Schedule E, page 2, then take your amortization expense on Schedule E, line 18.

For additional information, see IRS Pub 527, Residential Rental Property, and IRS Pub 535, Business Expenses.