Commercial Real Estate Tax Question

[lalla3]

s About Taxes)/commercial real estate tax question Advertisement Expert: Ivan Roth - 3/29/2009 I purchased a Net leased commercial real estate building in partnership with a friend in an LLC form. In the process of purchase we incurred several expenses including legal expenses, state fees, closing costs etc. How do we treat these expenses for tax purposes ? Can we reduce these expenses out of our interest income or do we have to add all these to the cost of the building and depreciate it over 39 years or so ?

I appreciate your opinion on this.

Thank you

[Konni]

HI anil where you said "interest income" I think you meant rental income as there is not a simple yes or no answer I have copied below the relevant section of publication 551 at www.irs.ustreas.gov

Real Property

If you buy real property, certain fees and other expenses become part of your cost basis in the property. Real estate taxes.   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. You cannot deduct them as taxes.  If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include that amount in the basis of the property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Settlement costs.   You can include in the basis of property you buy the settlement fees and closing costs for buying the property. You cannot include fees and costs for getting a loan on the property.(A fee for buying property is a cost that must be paid even if you bought the property for cash.)  The following items are some of the settlement fees or closing costs you can include in the basis of your property. Abstract fees(abstract of title fees).

Charges for installing utility services.

Legal fees(including title search and preparation of the sales contract and deed). Recording fees.

Surveys.

Transfer taxes. Owner's 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.  Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.  The following items are some settlement fees and closing costs you cannot include in the basis of the property. Fire insurance premiums. Rent for occupancy of the property before closing. Charges for utilities or other services related to occupancy of the property before closing. Charges connected with getting a loan. The following are examples of these charges. Points(discount points, loan origination fees).

Mortgage insurance premiums.

Loan assumption fees.

Cost of a credit report.

Fees for an appraisal required by a lender.

Fees for refinancing a mortgage.

If these costs relate to business property, items(1) through(3) are deductible as business expenses. Items(4) and(5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Points.   If you pay points to obtain a loan(including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. For more information on how to deduct points, see Points in chapter 5 of Publication 535. Points on home mortgage.   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. If certain requirements are met, you can deduct the points in full for the year in which they are paid. Reduce the basis of your home by any seller-paid points. For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Assumption of mortgage.   If you buy property and assume(or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Example.

If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Constructing assets.   If you build property or have assets built for you, your expenses for this construction are part of your basis. Some of these expenses include the following items. Cost of the land.

Cost of labor and materials.

Architect's fees.

Building permit charges.

Payments to contractors.  

[VenetiaRose]

All what you have do is before you make any deal with buying a property, its better to consult a real estate lawyer who can deal with all the issues connected with real estate law. My brother's friend faced a small issue with buying a real estate property and he consulted a real estate lawyer in Toronto who helped him out. < http://www.gcylaw.com/real-estate-service >