I am trying to calculate my depreciation amount. From what I read it is the purchase price + closing costs. Can I include the closing cost if it is paid by the seller?

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@jennifervphan wrote:

Can you help me figure out what items I can include in the depreciation amount? Are the rows highlighted in green correct? $568,414.47? I can delete this image after.

 

 

 

 

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The kinds of closing costs that are allowable as adjustments to basis are the costs you would have been required to pay even if you had paid in cash and not gotten a mortgage.  This can include a survey, county stamp tax for transferring the property, county fee for recording the deed, and so on.  They are listed in publication 523 on page 8.  

https://www.irs.gov/pub/irs-pdf/p523.pdf

More details about adjustments to basis are in publication 551.

https://www.irs.gov/forms-pubs/about-publication-551

As best I can tell:

Bank fees to NFM Lending and the Lender's title insurance are not allowed, because those costs are associated with the mortgage and you would not have paid them if you paid cash for the property.  I think the charge plus sales tax for the closing agent are probably allowable as "Legal fees (including fees for the title search and preparing the sales contract and deed)," as shown in Publication 523.  (Is there a second page to your closing statement?  Most counties charge some kind of transfer tax and recording fee.  Did you pay for a survey?  Did you pay for a title search?)

Furthermore, you must reduce your purchase price by the seller paid closing costs.  You didn't really buy the property for $565,000, you bought it for $548,050.  That's like checking out a $20 bottle of wine at the liquor store and the clerk hands you a $2 rebate, your cost is really $18.

@jennifervphan 

@AmeliesUncle 

I want to go back and clarify some things.  The closing statement @jennifervphan provided is dated 2021. You might be preparing a 2022 tax return or you might be planning for 2023.  (Or did you place the home in service as a rental in 2021 and you are preparing a very late 2021 tax return?)

When was, or will, the property be placed in service as a rental? Was it used as your personal home before it was placed in service as a rental?

If we consider the mortgage points only, separate from any other fees, the points may be deductible on your personal schedule A as an itemized deduction in 2021, the year of the home purchase. Or, they might be amortized over the life of the mortgage. If you deducted the points in full on your 2021 schedule A, then you can’t deduct them again as a rental expense in 2022 or 2023. 

If we consider other fees, like the bank processing fees and the bank (lenders) title insurance, my question for @AmeliesUncle  is, are those fees allocable to the rental property on schedule E if the home was used as a personal home before being placed in service as a rental?

So before we go into too much more detail into which fees are includable as basis, and which fees might be property expenses on schedule E, I would like to clarify the timeline.