Sale of Rental Property

[wsbjr]

A new client of mine sold some rental property in 2005 they had owned since 1999. In terms of calculating selling costs, is it proper to use the Settlement Charges figure in the Paid from Sellers Funds from the HUD-1 statement? I can't seem to find anything that clearly defines what can be used for selling expenses other than fix up costs and brokers fees.

Warren EA

[Bees Knees]

IRS Pub 551 says:

"Settlement costs. You can include in the basis
of property you buy the settlement fees and
closing costs for buying the property. You can-
not 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 settle-
ment 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 prep-
aration 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 inter-
est, 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.
1) Fire insurance premiums.
2) Rent for occupancy of the property before
closing.
3) Charges for utilities or other services re-
lated to occupancy of the property before
closing.
4) Charges connected with getting a loan.
The following are examples of these
charges.
a) Points (discount points, loan origination
fees).
b) Mortgage insurance premiums.
c) Loan assumption fees.
d) Cost of a credit report.
e) Fees for an appraisal required by a lender.
5) 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.

[wsbjr]

Selling Expenses

Thank you for your response. However, my question is related to the seller, not the buyer. Can the seller deduct the closing costs on the HUD-1 other than the Broker fees

[Bees Knees]

Basis rules apply equally to sellers and buyers. If a buyer gets to add something to basis, the seller paying the same cost would get to do the same. The only thing that this does not apply to is points. Seller paid points are deductible by the buyer and reduce the amount realized by the seller. Other than that, when you read about a seller or buyer adding something to basis, assume they are interchangeable.