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Old 01-30-2014, 09:52 AM
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What expenses from closing fees etc can be claimed as expense

I looked around in the other threads, but I was not able to confirm some of my understanding. I will appreciate some guidance.

I recently purchased a house (Nov 2013). The house already had a tenant. I have agreed to let her stay until the end of the school year. I will keep the property as a rental.

I am tying to figure out how to do the depreciation on the rental and what amount of the closing fees can be claimed as expense or some goes under the basis for the depreciation.

First, I purchased the house at a much lower price than the last tax assessment from the township... so I think I can just use the same land/building ratio from last time to estimate the amount that should be for the building that I can depreciate... However, can I use part of the closing fees for expense or to increase the amount of the basis? Do I use the entire amount on the building estimated price or split it between land and building.

During the closing the previous owner also forwarded me some of already collected rent and the tenants security deposit. I will include this rental as income. I understand that the security deposit is no required to be reported as it will be returned to the tenant.

I also paid for the insurance for 12 months... hence some is for year 2014. I will need to prorate the amount for 2013 and use this as expense for 2013, right?

I had to do some minor repairs. I performed the work by myself. I purchased some tools, paint, etc... can I put this as expenses for 2013? Finally, I pay the water bill. What happens if the bill for Dec, comes in January and includes days from January? Do I have to prorate the amount for the days in 2013, or I put the entire amount in the next year?

I much appreciate your answers.

Best,
NM



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Old 01-30-2014, 11:56 AM
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Originally Posted by NM123 View Post



#1;I recently purchased a house (Nov 2013). The house already had a tenant. I have agreed to let her stay until the end of the school year. I will keep the property as a rental.

I am tying to figure out how to do the depreciation on the rental and what amount of the closing fees can be claimed as expense or some goes under the basis for the depreciation.



#2;First, I purchased the house at a much lower price than the last tax assessment from the township... so I think I can just use the same land/building ratio from last time to estimate the amount that should be for the building that I can depreciate...


#3; However, can I use part of the closing fees for expense or to increase the amount of the basis?

#4; Do I use the entire amount on the building estimated price or split it between land and building.

During the closing the previous owner also forwarded me some of already collected rent and the tenants security deposit. I will include this rental as income.


#5;I understand that the security deposit is no required to be reported as it will be returned to the tenant.

#6;I also paid for the insurance for 12 months... hence some is for year 2014. I will need to prorate the amount for 2013 and use this as expense for 2013, right?

#7;I had to do some minor repairs. I performed the work by myself. I purchased some tools, paint, etc... can I put this as expenses for 2013?


#8;Finally, I pay the water bill. What happens if the bill for Dec, comes in January and includes days from January?
#9;Do I have to prorate the amount for the days in 2013, or I put the entire amount in the next year?

I much appreciate your answers.

Best,
NM
#1;As yu can see, since you own the home for purposes of rental income, you should calculate depreciation on the home for tax purposes. Spreading the cost of the home over a number of years reduces the impact of rental income on tax returns during each year the home is used for that purpose. For residential real estate, calculate depreciation on the home over the 27.5 years under S/L method you are allowed to deduct it for tax purposes. Look up the cost basis for the home being used as a rental property. In most cases, this amount is the total purchase price of the home, including both the down-payment and the mortgage amount. (those who you lived in the home before converting it to a rental property, the cost basis is the lower of either the purchase price or the fair-market value of the home at the time it is converted to rental property.). Subtract the FMV of the land from the cost basis of the rental home. Land is not subject to depreciation. For example, if you purchased a rental home for $270K and the land on which it sits is worth $30K, then you will be able to depreciate $240K for tax purposes. You need to divide the value of the rental home by 27.5 years to find the annual depreciation of the home. For example, $240K divided by 27.5 equals $8,727 of home depreciation per year and $727.25;$8727/12 per month to include on your tax return. Count the number of months from the first point the home was available to be rented until the end of the calendar year. The first of these months only counts as half a month, so if the home was available beginning in September, it counts as 3.5 months for tax purposes (half of September, plus October, November and December).Divide the number of months by 12 to find the portion of the year's depreciation to claim. In the above example, 3.5 divided by 12 is 0.29 of the year.Multiply the portion of the year the home was used as rental property by the annual depreciation you had calculated. In this case, 0.29 times $8,727 is $2,531 of depreciation to claim for the first year. When you dispose of the home , then you MUSTrecapture the unrecap depre on your return as ordinary income taxed at 25%(as long as your tax rate is 25% o rhigher) as unrecxap r/e depre; it is neither sec 1245 nor sec1250 rule.








#2;Then, the depreciable basis of the home is FMV( I mean the purchase price that you paid for the home) as a depreciation basis represents what you would pay for an asset in an arms-length transaction. Acquisition costs; included are any commissions, title fees, transfer taxes and the cost of any options to purchase.--such as closing costs can increase the depreciation basis of the asset. your basis , the historical basis, is increased by the cost.


#3;as mentioned above.youmust split it between land and building since you can never depreciate the land.

#4;report it as income on Sch E of 1040.


#5;correct; report it as deposit receivable in debit and deposit payable in credit in your book.

#6;correct. say in june 1, 2013, you paid $1200 for prepaid ins, then on 2013 return, you can deduct $1200*7/12=$700; and you need to deduct the remaining $500 on your 2014 return regardless of your acct method.

#7;you can deduct repair costs on Sch E of 1040 on your 2013 return, Unlike repairs made to your personal residence, rental property repair costs that are incurred to place the property in rentable condition or to maintain it are deductible on Schedule E of your personal 1040 tax return. Maintain good records. To deduct rental repairs, you must be able to document the write-off. Find a safe place to store all of your receipts for tools, canceled checks and bank statements. Keep track of any travel expenses you incur for rental property repairs. You are allowed to take the standard mileage rate or deduct actual expenses. You can deduct the business portion of necessary travel expenses for airfare, meals and lodging when traveling out of your immediate area.




#8; If the rental property is used for a business, utility expenses qualify as a business outlay and are tax-deductible. Other expenditures associated with the use of the property, such as rent, renter's insurance, as well as investments you have made into the property, can be deducted from the taxable gross income of the business.

#9;aslongas you pay the bill by the end of 2013 as most cash basis taxpayers do, then deduct it on your 2013 return.



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Old 02-05-2014, 10:45 AM
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Thanks for your detailed answer.

May I ask the following as well:

1. If I replace very old/existing gas furnace, do I put the cost as expense (deduct from income received) or under equipment for depreciation?

2. How about installing a AC system? There is no AC now. Does this qualify as expense or it is equipment to be depreciated?

Can I deduct the fees for inspections etc ?

Thanks a lot.

Best
NM



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Old 02-05-2014, 08:54 PM
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Originally Posted by NM123 View Post
Thanks for your detailed answer.

May I ask the following as well:

#1. If I replace very old/existing gas furnace, do I put the cost as expense (deduct from income received) or under equipment for depreciation?

#2. How about installing a AC system? There is no AC now. Does this qualify as expense or it is equipment to be depreciated?

#3;Can I deduct the fees for inspections etc ?

Thanks a lot.

Best
NM
#1;you need to put it as exp.under eqmt for depre; The sec 179 deduction /bonus depre is not allowed for property used in connection with residential rental property. It is up to your management to determine the useful life of the furnace. It would be impossible to establish specific rules, since the life of an asset is dependent upon each specific situation.. So if the old one is placed in the rental then the amount used for depreciation is the value of the used one at the time it was placed in the rental property . The original furnace will be part of the building depreciation, but a new furnace(the old one) starts depreciating the year purchased, and you write off a portion of the cost over 27.5 years, according to IRS charts.I guess or during the remaining depreciable life of the pty.

#2;it needs to be depreciated;installation of a central AC unit is not one of those expenses which you can deduct fully in a given tax year; new air-conditioning unit is eqmt. It may be about ten years, and that will allow you to claim a deduction of 10% of the total cost each year. You may buy and install your new energy-efficient central air-conditioning system and save all your receipts for credit; you need to review the energy-efficiency tax credit savings available. The tax law introduced energy-efficiency tax credits for 30 percent of the total cost to purchase an energy-efficient central air-conditioning unit.
However, there is still one important property category you can deduct under Section 179: Personal property you use in your rental business that is not located inside your rental buildings. This can include:For example, if you spend $1,000 for office furniture for the office you use in your rental business, you may deduct the entire amount in a single year using Section 179. Section 179 can only be used if your rental activities qualify as a business for tax purposes. You can’t use it if your rental activity is an investment, not a business.







#3;correct; you can deduct it on Sch E of 1040.i believe it is.you may contact the irs for sure.



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Old 02-11-2014, 12:27 AM
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Thanks again for the detailed answers.

If I received an invoice and paid it in 2014 for a service that was performed in 1023, do I include it in year 2013 or 2014? the service (snow removal) was performed by a person, who invoiced us in January 2014 for services in 2013 and 2014. This was paid by the owner of one of the two condos that are on the property. The I paid the other owner and received copies of the condo association expenses and receipts.

In the building depreciation I include the closing fees. I read in one of the IRS publication (if I understood it correctly that in the settlement and closing fees that go towards the basis, I would have to include transfer taxes. What does it include? Does it include the property tax that the previous owner had paid and I had to pay part of it back to him to cover some of the last quarter tax? I thought that property tax goes under expenses.

If the floors have damages and the protective coating has pealed off, can I put the repairs (rented tools and materials) and application of protective layer as expense? I made the repairs and coating application by myself.

Best Regards,



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Old 02-11-2014, 01:03 AM
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Originally Posted by NM123 View Post
Thanks again for the detailed answers.

#1;If I received an invoice and paid it in 2014 for a service that was performed in 1023, do I include it in year 2013 or 2014?

#2;the service (snow removal) was performed by a person, who invoiced us in January 2014 for services in 2013 and 2014. This was paid by the owner of one of the two condos that are on the property. The I paid the other owner and received copies of the condo association expenses and receipts.

#3;In the building depreciation I include the closing fees. I read in one of the IRS publication (if I understood it correctly that in the settlement and closing fees that go towards the basis, I would have to include transfer taxes. What does it include?



#4;Does it include the property tax that the previous owner had paid and I had to pay part of it back to him to cover some of the last quarter tax? I thought that property tax goes under expenses.

#5;If the floors have damages and the protective coating has pealed off, can I put the repairs (rented tools and materials) and application of protective layer as expense? I made the repairs and coating application by myself.

Best Regards,
#1;it depends on your accounting method; aas a cash method user, you need to report the exp on your 2014 return sine you actually paid it in Jan 2014;As an accrual method TP, as the exp was incurred in 2013, you can report it on your 2013 return. Under an accrual method of accounting, you generally deduct or capitalize a business expense when the services were provided to you and The liability , a/p, could be determined with reasonable accuracy.

#2;as mentioned above it depends. The cash method is the more commonly used method of accounting in small business. Under the cash method, expenses are not counted until they are actually paid

#3;correct

#4;correct.The only deductible closing costs are those for interest and deductible real estate taxes. Other closing costs such as transfer taxes add to the cost basis of the property and become part of your depreciation, I mean they increase your basis adjusted basis of the rental pty so your annual depre amount ‘d be increased also.



#5; you’d expense this item. It could be defended that it was a repair that brought the original floors back up to required standards and not as something that "increased" it's value or function. repair is maintenance that is necessary to keep the property in working condition;repairs as re those that do not add significant value to the property or extend its life.” They are reasonable in amount and are necessary to keep the property in habitable condition.



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