First year with schedule E on tax return


Hello everyone,

My Name is Vandana and I am preparing Schedule E for the first time. Any help would be appreciated.
I purchased a rental property last year for $30,000. I took a mortgage and paid some fees as below.
Deposit or earnest money $500
Seller concession $1100
Prorated taxes: $503
Loan origination $4500
Underwriting fees: $500
Inspection: 300
Broker fee: 1127
Closing fee: 400
Title insurance: 500
Recording fee: 61

I also made major improvements to house. I paid lump sum amount to agent who improved house. Some appliances and carpets were changed and price for that was included in that lump sum payment.
Then in Oct., I refinanced the loan and incurred closing costs as below
Loan origination fee: 1700
Appraisal fees: 350
Closing fee: 200
Title search: 75
Title insurance: 250
Recording: 75

I kept house open for rent in Oct but wasn't able to find any tenant. Hence, had no rental income last year.
I got few questions.

1)   How should I treat closing cost of original mortgage and refinanced mortgage? How much should I add to the cost of house, how much should I amortize over the life of loan and how much I can deduct in current year?
2)   Do I get full deduction for points on original mortgage as I refinanced? If so, which line on Schedule E does it go?
3)   Should I treat improvement as a separate asset or should I add improvement cost to the value of house?
4)   For depreciation purpose, should I treat alliances as a separate asset or should I charge everything to cost of house?

Dave T:
In my humble opinion, with three exceptions, all of the costs you itemized for your purchase mortgage are added to the cost basis of the proprety.  First, the earnest money deposit is already included in your purchase price so ignore that one.  Second, the seller concession is a rebate on your purchase price is subtracted from your basis.  And third, the prorated taxes are an expense which you can claim on your Schedule E.  Don't include this one in your cost basis.  By my calculation, your initial cost basis for this property is $36288.

The next step is to adjust you basis for the cost of any repairs and improvements you made to get the property ready to rent.  Add whatever that number is to your initial basis of $36288.

If you wish, take the cost of appliances and carpet as a separate asset and depreciate them over five years.  You can also leave them in the depreciation basis for the house, but you get a little better depreciation expense if you segregate them.

When you refinanced the property, all of your loan costs are amortized over the life of the loan.  If your loan is for 30 years, then add up all your refinance costs, divide by 30, and expense that amount as Amortized Loan Fees each year on your Schedule E.

Just how I see it.

Thanks Dave.

Huett Properties:
I'm a newbie but a 15% origination fee sounds aweful. Any particular reason it was $4,500. on your initial loan?  Is that how hard money works or something?

Dave T:
From the size of the fee, I am guessing she used 100% financing from a hard money lender.


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