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Tenant wants to buy rental. Can I deduct the fees for the appraisal I had done?

Forum|Forum|3 years ago
February 19, 2023
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Best answer by MAK70

To clarify, in Publication 527, the appraisal fees are not added to the basis if REQUIRED BY A LENDER. (emphasis added). Generally, appraisal fees will be deductible on your Schedule C or Schedule E if the appraisal is conducted for business reasons. Getting an appraisal to know the current value in order to decide whether to keep or sell a property is an ordinary and necessary business expense since it would be foolish to just come up with a price randomly. While you can use real estate agents' comps, you can also hire a consultant with specialized knowledge of valuations (this is an appraiser).

If a taxpayer incurs transaction costs (including appraisal fees) while selling or disposing of property other than inventory, transaction costs are capitalized. Under the general rule, capitalized transaction costs are (1) in the year of sale, subtracted in arriving at the amount realized, or (2) in the year the sale is abandoned, deducted as a loss under Sec. 165, if permissible. Under an alternate rule, taxpayers add capitalized transaction costs to adjusted basis in situations involving securities, like-kind exchanges, and installment sales.

See 26 CFR § 1.263(a)-2.

M

MAK70

Yes you can add them as sales expenses if you are currently selling the property, or as a rental expense if you did not sell in 2022.

Carl11_2

Employee

@MAK70 I differ on this. Per IRS Publication 527 Basically, page 7 says appraisal fees can't be added to the cost basis.

It indirectly says appraisal fees are deductible at settlement costs (closing costs, sales expenses) only if they are a requirement of the lender for loan approval. Typically, not something deductible by the seller.

Last item on page 7 of IRS Pub 527, item #3d.

They are also not deductible as a direct rental expense either. I've seen situations where a property insurer required a property appraisal as a condition of insuring the property. In that situation it would seem to me the appraisal cost is included in the insurance costs for that first year.

M

MAK70Answer

To clarify, in Publication 527, the appraisal fees are not added to the basis if REQUIRED BY A LENDER. (emphasis added). Generally, appraisal fees will be deductible on your Schedule C or Schedule E if the appraisal is conducted for business reasons. Getting an appraisal to know the current value in order to decide whether to keep or sell a property is an ordinary and necessary business expense since it would be foolish to just come up with a price randomly. While you can use real estate agents' comps, you can also hire a consultant with specialized knowledge of valuations (this is an appraiser).

If a taxpayer incurs transaction costs (including appraisal fees) while selling or disposing of property other than inventory, transaction costs are capitalized. Under the general rule, capitalized transaction costs are (1) in the year of sale, subtracted in arriving at the amount realized, or (2) in the year the sale is abandoned, deducted as a loss under Sec. 165, if permissible. Under an alternate rule, taxpayers add capitalized transaction costs to adjusted basis in situations involving securities, like-kind exchanges, and installment sales.

See 26 CFR § 1.263(a)-2.