Capitalization/Expense of Closing Costs - Posted by Rich
Posted by Rich on February 24, 2001 at 05:31:46:
I just bought an investment property with 3 apartments, garages, and storage areas for rent. I have several questions on real estate, specifically on 1) closing costs and 2) how to determine what portion of the property is land and what is building.
- Is there some straight forward line by line breakdown of a HUD-1 settlement sheet that shows what must be capitalized, for how long, and those line items that are immediately expensed? From what I can determine from my references, the following can be expensed:
Section 800. Items payable in connection with loan:
Loan origination fee (points)
Tax service fee
Document Prep fee
Section 900. Items required by lender to be paid in advance
Mortgage insurance premium
hazard insurance premiium
Lines 106-112 Adjustments for items paid by seller in advance
Lines 210-219 Adjustments for items unpaid by the seller
The following items would be capitalized and amortized over 27.5 years
Section 1100 Title charges from the title company:
FedEx charges to express mortgage papers
Section 1200 Government recording & transfer charges
city/county/state tax stamps
Section 1300. Additional settlement charges
Attorney fee (represented me through purchase and closing).
I also assume that Section 1000 Reserves Deposited with Lender must be treated as a current asset (prepaid taxes and insurance), and would only be deductible once expended.
Now, question # 2 (whew!)
Is there a formula commonly used to determine the split between building and land? Someone suggested 80%/20%. Since land cannot be depreciated, it is to my advantage to split out as much towards the building as possible to be depreciated over 27.5 years, but also to break out underground utility pipes, fences, and landscaping for 15 year depreciation. One way is to do a comp on unimproved land of similar size in the same vicinity, or I can use the tax assessor’s numbers (not in my favor), but I’m looking for a method that would stand up to scrutiny (and audit).