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Real Estate Deductions for a Company

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Corrado79

New Contributor
Sep 24, 2007
86
4
12
Santa Monica, CA
These two question are for Diane, or anyone else similarly experienced in accounting. I recently set up a new LLC and purchased a piece of rental property (condo-hotel). I was wondering to what extent can I deduct the closing costs? I know that for a personal homeowner, only mortgage interest and property taxes can be deducted (and the points charged on the mortgage under some situations), but since my business purchased the property, can I deduct the closing costs as a business expense, or must they be capitalized into the property?

Also, what are the rules in terms of depreciating the property if it's a condo (i.e a vacation property) versus if it's a genuine rental/commercial unit. Does the fact that it's rented out and receives rental income sufficient, or does the property need to have some kind of official "commercial" demarcation in the Note/Deed?

Thanks in advance!!!
 

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Diane Kennedy

Bronze Contributor
Aug 31, 2007
795
209
49
These two question are for Diane, or anyone else similarly experienced in accounting. I recently set up a new LLC and purchased a piece of rental property (condo-hotel). I was wondering to what extent can I deduct the closing costs? I know that for a personal homeowner, only mortgage interest and property taxes can be deducted (and the points charged on the mortgage under some situations), but since my business purchased the property, can I deduct the closing costs as a business expense, or must they be capitalized into the property?
For a property purchased as an investment, every cost is either immediately expensed or capitalized.

"Closing costs" tends to lump a lot of other things together. You'll need to look at the page on your HUD-1 Closing Statement that lists out what the expenses are. Items such as property tax, mortgage interest and other items typically associated as expenses are going to be immediately deductible. Other items roll into basis and are then capitalized.

I went through the Closing Statement, line by line, to show the coding in a home study course I have called "Easy Accounting for Real Estate Investors". If you are serious about your investing, you may want to pick up a copy for yourself or your bookkeeper. To be honest, if you're only doing one property - probably not worth the effort. If in doubt, capitalize, you can't get in trouble that way.

Also, what are the rules in terms of depreciating the property if it's a condo (i.e a vacation property) versus if it's a genuine rental/commercial unit. Does the fact that it's rented out and receives rental income sufficient, or does the property need to have some kind of official "commercial" demarcation in the Note/Deed?

Thanks in advance!!!
I want to make sure we're talking about the same thing. A condo property can be a genuine rental property, just like a free-standing property. The question is whether it is rented out! If you have a property that is partially used for personal use, there are some additional rules.

For depreciation purposes: The difference is that the condo has little or no land associated with it, so that the percentage that is allocated to non-depreciable land is much smaller. (For tax purposes, that's a good thing)

You don't need to make any title changes to indicate that a property is rental. In some areas, you might have to register as a rental with a local government. For example, properties that we own in Tempe, Arizona must pay a rental tax based on rents received. Yet properties right over the line in Phoenix, Arizona don't have a rental tax.
 
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Corrado79

New Contributor
Sep 24, 2007
86
4
12
Santa Monica, CA
For a property purchased as an investment, every cost is either immediately expensed or capitalized.

"Closing costs" tends to lump a lot of other things together. You'll need to look at the page on your HUD-1 Closing Statement that lists out what the expenses are. Items such as property tax, mortgage interest and other items typically associated as expenses are going to be immediately deductible. Other items roll into basis and are then capitalized.

I went through the Closing Statement, line by line, to show the coding in a home study course I have called "Easy Accounting for Real Estate Investors". If you are serious about your investing, you may want to pick up a copy for yourself or your bookkeeper. To be honest, if you're only doing one property - probably not worth the effort. If in doubt, capitalize, you can't get in trouble that way.
I will definitely look into that course. Yes, it is just one property for now, but this is just the start for me. I am also planning on buying some of your books (investors guide to RE investing loopholes and investors guide to tax-free RE investing). I can't wait to read them. I am inclined to just capitalize them at this juncture. Next go around, I'll have read your book and will know better how to handle them. I was just wanted to see if there was anything other than mortgage interest and property taxes that I could expense.

I want to make sure we're talking about the same thing. A condo property can be a genuine rental property, just like a free-standing property. The question is whether it is rented out! If you have a property that is partially used for personal use, there are some additional rules.

For depreciation purposes: The difference is that the condo has little or no land associated with it, so that the percentage that is allocated to non-depreciable land is much smaller. (For tax purposes, that's a good thing)
Got it. This is a condo-hotel, so it probably has even less land than a normal condo. I know very little about how to properly depreciate a property so this is something I need to learn. This unit is strictly for rental and not personal use.

Oh, and I noticed you invest in rental properties in AZ. Although I am in CA, my plan is to begin investing in rental properties in AZ as well. How is the market there for SF and MF's?

Thanks again for your help!!
 

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