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Subject:  Rental Condo Tax Issues Date:  4/20/2003  8:46 PM
Author:  geocarw Number:  65119 of 131269

Hello fellow Fools,

DW and I are planning to purchase a condominium unit for rental property. We currently own a home acquired debt free from a parent that we rent out, so the world of Schedule E and Form 4562 is not totally foreign. However, this is our first venture into the world of financed rental property.

The facts of the matter…

Our daughter has bought a house and is selling her condo which we have agreed to purchase. She is a loan officer with a local mortgage broker and will arrange all financing.


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 200
Item 811 Underwriting fee 425
Item 1101 Closing/escrow fee (Title Company) 125
Item 1108 Title Insurance (Title Company) 325
Item 1202 Recording fees (County) 75
Lender fee to forego Item 1004 Taxes/Assessment Reserves 210


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?

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?

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%)?

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?

Thanks for your help.


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