Publication 527- Residential Rental Property - 2002 (Page 11 of 19) in pdf

•

debt obligation, in other property, or in services.

Assumption of a mortgage. If you buy

Amounts spent after a casualty to restore

Your cost also includes amounts you pay for:

property and become liable for an existing mort-

the damaged property,

gage on the property, your basis is the amount

•

The cost of extending utility service lines

Sales tax charged on the purchase,

you pay for the property plus the amount that still

to the property, and

•

must be paid on the mortgage.

Freight charges to obtain the property, and

•

Legal fees, such as the cost of defending

•

Installation and testing charges.

Example. You buy a building for $60,000

and perfecting title.

cash and assume a mortgage of $240,000 on it.

Your basis is $300,000.

Additions or improvements. Add to the

Loans with low or no interest. If you buy

basis of your property the amount an addition or

property on any time-payment plan that charges

Land and buildings. If you buy buildings and

improvement actually cost you, including any

little or no interest, the basis of your property is

your cost includes the cost of the land on which

amount you borrowed to make the addition or

your stated purchase price, less the amount

they stand, you must divide the cost between the

improvement. This includes all direct costs, such

considered to be unstated interest. See Un-

land and the buildings to figure the basis for

as material and labor, but not your own labor. It

stated Interest and Original Issue Discount in

depreciation of the buildings. The part of the cost

also includes all expenses related to the addition

Publication 537, Installment Sales.

that you allocate to each asset is the ratio of the

or improvement.

fair market value of that asset to the fair market

For example, if you had an architect draw up

Real property. If you buy real property, such

value of the whole property at the time you buy

plans for remodeling your property, the

as a building and land, certain fees and other

it.

architect’s fee is a part of the cost of the remod-

expenses you pay are part of your cost basis in

If you are not certain of the fair market values

eling. Or, if you had your lot surveyed to put up a

the property.

of the land and the buildings, you can divide the

fence, the cost of the survey is a part of the cost

Real estate taxes. If you buy real property

cost between them based on their assessed

of the fence.

and agree to pay real estate taxes on it that were

values for real estate tax purposes.

Keep separate accounts for depreciable ad-

owed by the seller and the seller did not reim-

ditions or improvements made after you place

burse you, the taxes you pay are treated as part

Example. You buy a house and land for

the property in service in your rental activity. For

of your basis in the property. You cannot deduct

$100,000. The purchase contract does not

information on depreciating additions or im-

them as taxes paid.

specify how much of the purchase price is for the

provements, see Additions or improvements to

If you reimburse the seller for real estate

house and how much is for the land.

property, earlier, under Recovery Periods Under

taxes the seller paid for you, you can usually

The latest real estate tax assessment on the

GDS.

deduct that amount. Do not include that amount

property was based on an assessed value of

The cost of landscaping improvements

in your basis in the property.

$80,000, of which $68,000 is for the house and

is usually treated as an addition to the

$12,000 is for the land.

Settlement fees and other costs. Settle-

basis of the land, which is not deprecia-

CAUTION

You can allocate 85% ($68,000 ÷ $80,000)

ment fees and closing costs that are for buying

ble. See What property can be depreciated, ear-

of the purchase price to the house and 15%

the property are part of your basis in the prop-

lier.

($12,000 ÷ $80,000) of the purchase price to the

erty. These include:

land.

•

Assessments for local improvements.

Abstract fees,

Your basis in the house is $85,000 (85% of

Assessments for items which tend to increase

•

$100,000) and your basis in the land is $15,000

Charges for installing utility services,

the value of property, such as streets and side-

(15% of $100,000).

•

walks, must be added to the basis of the prop-

Legal fees,

erty. For example, if your city installs curbing on

•

Recording fees,

the street in front of your house, and assesses

Basis Other Than Cost

•

you and your neighbors for the cost of curbing,

Surveys,

you must add the assessment to the basis of

•

There are many times when you cannot use cost

Transfer taxes,

your property. Also add the cost of legal fees

as a basis. You cannot use cost as a basis for

•

paid to obtain a decrease in an assessment

Title insurance, and

property that you received:

levied against property to pay for local improve-

•

Any amounts the seller owes that you

ments. You cannot deduct these items as taxes

In return for services you performed,

agree to pay, such as back taxes or inter-

or depreciate them.

•

In an exchange for other property,

est, recording or mortgage fees, charges

Assessments for maintenance or repair or

•

for improvements or repairs, and sales

meeting interest charges are deductible as

As a gift,

commissions.

taxes. Do not add them to your basis in the

•

From your spouse, or from your former

property.

spouse as the result of a divorce, or

Some settlement fees and closing costs you

Deducting vs. capitalizing costs. You

•

cannot include in your basis in the property are:

As an inheritance.

cannot add to your basis costs that are deducti-

ble as current expenses. However, there are

1) Fire insurance premiums,

If you received property in one of these ways,

certain costs you can choose either to deduct or

see Publication 551 for information on how to

2) Rent or other charges relating to occu-

to capitalize. If you capitalize these costs, in-

figure your basis.

pancy of the property before closing, and

clude them in your basis. If you deduct them, do

not include them in your basis.

3) Charges connected with getting or refi-

nancing a loan, such as:

The costs you may be able to choose to

Adjusted Basis

deduct or to capitalize include carrying charges,

a) Points (discount points, loan origination

such as interest and taxes, that you must pay to

Before you can figure allowable depreciation,

fees),

own property.

you may have to make certain adjustments (in-

creases and decreases) to the basis of the prop-

b) Mortgage insurance premiums,

For more information about deducting or

erty. The result of these adjustments to the basis

capitalizing costs, see chapter 8 in Publication

c) Loan assumption fees,

is the adjusted basis.

535.

d) Cost of a credit report, and

Increases to basis. You must increase the

Decreases to basis. You must decrease the

e) Fees for an appraisal required by a

basis of any property by the cost of all items

basis of your property by any items that repre-

lender.

properly added to a capital account. This in-

sent a return of your cost. These include:

cludes:

•

Also, do not include amounts placed in es-

The amount of any insurance or other pay-

•

crow for the future payment of items such as

The cost of any additions or improvements

ment you receive as the result of a casu-

taxes and insurance.

having a useful life of more than one year,

alty or theft loss,

Page 11

Publication 527- Residential Rental Property - 2002 Page 11

Related Articles

Related forms

Related Categories