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No. of Recommendations: 1
80% fixed rate first mortgage; Closing costs below
20% HELOC (on our personal residence); No closing costs.

Closing costs (first mortgage) ~$1,360 as listed on Good Faith Estimate:
Item 803 Appraisal fee 200Item 811 Underwriting fee 425Item 1101 Closing/escrow fee (Title Company) 125Item 1108 Title Insurance (Title Company) 325Item 1202 Recording fees (County) 75Lender fee to forego Item 1004 Taxes/Assessment Reserves 210

Assumptions:

15% tax bracket.

…and now some issues/questions:

1. Financing costs deductibility. I (know/think) interest paid on the first mortgage is a deductible expense. But, is the interest paid on the HELOC, secured by our personal residence, a deductible business expense?


I don't know what a HELOC is, but if a loan is financing the rental property, the interest on the loan is an expense against the rental income.

2. Closing cost deductibility. When I read some of the IRS pubs e.g., 936, my eyes glaze over. Then I realize we're talking investment property, not personal residence, so now I'm not at all sure where I should be looking. Given the closing costs items above, which are deductible and which must be amortized? Is paying the lender a fee to avoid escrow of RE taxes a legitimate business expense? What pubs should we be reading?

Check out Pub 527. I'm not an expert in this area, but it seems to me that all should be capitalized, except for item 75, which I wouldn't pay unless this is the only lender on the face of the earth.

3. Determining the condominium's depreciation basis. - County tax records show a 21% Land, 79% Improvements relationship for tax assessment. Is this a reasonable method to determine the basis for depreciation? (purchase price times 79%)?

That's how I'd do it, remembering that capitalized purchase expenses (and any immediate capital improvements) are part of your depreciable basis.

County tax records contain the statement “BLDG 2 UNIT A 3.22% IN COMMON ELEMENTS (11389 2167)”. What, if anything, does this have to do with figuring depreciation?

Nothing.

Phil Marti
VITA Volunteer
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