Capitalization/Expense of Closing Costs - Posted by Rich

import · February 24, 2001, 4:31am

Posted by Wayne-NC on February 24, 2001 at 08:46:32:

Your appraisal will show a breakdown of land and building value. They are the numbers that my insurance company uses. They are determined by the cost per square foot to build in your area times the square footage of the building. Ofcourse the mortgage company wants the full value of the loan insured which includes some land value, but that is another issue.

import · February 24, 2001, 4:31am

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
Flood cert.
Document Prep fee

Section 900. Items required by lender to be paid in advance
Interest
Mortgage insurance premium
hazard insurance premiium

Lines 106-112 Adjustments for items paid by seller in advance
taxes
water/sewer
waste fee
housing license

Lines 210-219 Adjustments for items unpaid by the seller
taxes
water/sewer

The following items would be capitalized and amortized over 27.5 years

Section 1100 Title charges from the title company:
document prep
notary fees
title insurance
endorsements
FedEx charges to express mortgage papers

Section 1200 Government recording & transfer charges
recording fees
city/county/state tax stamps

Section 1300. Additional settlement charges
tax certs
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).

Rich

import · February 24, 2001, 8:20pm

Re: Capitalization/Expense of Closing Costs - Posted by Bud Branstetter

Posted by Bud Branstetter on February 24, 2001 at 21:20:53:

When you do investment property you want the largest portion to be the building to give you greater depreciation. You obviously bought with a profit built in so you want to prorate. You could use the existing tax proration or the insurance proration between building and land. What you would not want to use is a sales price of vacant land if it were higher than the assessor land value. I don’t think you’ll get great savings and as long as it is rational you should be okay.

import · February 24, 2001, 8:20pm

Re: Capitalization/Expense of Closing Costs - Posted by Bud Branstetter

Posted by Bud Branstetter on February 24, 2001 at 21:20:15:

When you do investment property you want the largest portion to be the building to give you greater depreciation. You obviously bought with a profit built in so you want prorate. You could use the existing tax proration or the insurance proration between building and land. What you would not want to use is a sales price of vacant land if it were higher than the assessor land value. I don’t think you’ll get great savings and as long as it is rational you should be okay.