I was answering a client’s question the other day and I realized that some of the questions I get are probably on many people’s minds and it may be helpful for me to address some of these in our blog. For the next few weeks, our Friday blog will focus on some of these questions.
QUESTION: Mike, I just purchased a rental property and I was wondering if you need the closing statement when you do my tax returns and if I can deduct any of the closing costs?
ANSWER: Great question! Unfortunately, many real estate attorneys are not very familiar with tax law and may not be too helpful at the closing table with answering tax strategy questions. Luckily when my attorneys do closings for clients, its one-stop shopping, and we can ensure that the relevant documents get into your tax package for that tax year. Regardless of who you use for the closing, it is very important for us to get a copy of the closing statement, often called a HUD, because there are a ton of good opportunities to save you money at tax time, not to mention accurate calculation of the depreciation deduction on your rental. Generally, deductible closing costs are those for interest, certain mortgage points, and deductible real estate taxes.
Many other settlement fees and closing costs for buying the property become additions to your basis in the property, and part of your depreciation deduction, including:
- Abstract fees
- Charges for installing utility services
- Legal fees
- Recording fees
- Surveys
- Transfer taxes
- Title insurance
- Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions).
When properly handled on your tax return, these costs can really shelter much of the rental income you receive from tax. After you purchase the rental property, it is important to talk to me about properly structuring your new investment in terms of asset protection planning, but also additional tax savings. Holding rental property in an LLC can reap huge rewards at tax time, as well as protecting you in the event of a lawsuit.
If you have your own questions on this topic or any other topics, please schedule some time with one of our professionals to make sure your overall tax structure suits your needs and is designed to maximize tax benefits and save you money.