I need a code section reference

[abby]

My boss wants me to provide a code section reference for the treatment of loan costs when purchasing real estate.

Specifically that costs of acquiring a loan are NOT included in the basis of the asset. I couldn't pinpoint anything in my RIA searches, so I am at a loss to know where to look in the code.

I have plenty of proof out of the pubs, but he wants code.

Specifically, we are dealing with a personal residence, so the costs are not even eligible for amortization (talking about costs other than points here) as they would be on a business asset.

Thanks in advance for any assistance.

[BHoffman]

Try IRC 461(g)

Here's a link.

http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._461._General_rule_for_taxable_year_of_deduction

[abby]

other than interest?

Thanks so much for your response.

I'm looking at loan costs such as the lender charges - appraisals, broker fees, legal fees, junk fees and any other charge made to obtain the loan.

Interest is usually deductible in some manner, either upfront (like points paid to obtain a primary residence) or over the life of the loan, but the other costs to obtain a loan are lost for a personal residence; not deductible and not allowed as an addition to basis.

If anyone knows if this is stated in the code...

Thanks again.

[Burke]

These should be anything listed on the HUD-1 or settlement statement under lines from 800 down to 1100.

[JohnH]

You can tell him that anything not specifially described as deductible in the code is not deductible. So the absence of a code reference means it isn't deductible, not the other way around.

[Zee]

Code reference?

Abby-

I can't find code references either, and it sounds like you're fully aware of what's deductible and what isn't. However, for what it's worth I've attached a link to a matrix prepared by Tax Slayer software, which indicates what's deductible by line reference on the HUD statement.

http://kb.taxslayer.com/article.php?id=475

I'll watch the post to see if someone else answers with the code reference. If not, please post what you find.

I hate it when people demand code references. A publication cite should be enough, but I guess you can't tell that to your boss.

[abby]

Thanks all

Zee, that's a very interesting link - it shows a couple of the loan costs as OK to add to basis where the pubs say they must also be excluded from the settlement costs allowed - like the appraisal fee (if required by the lender) - so Taxslayer is taking a different position.

Still, it's great that they match up to the actual lines of the HUD the Taxbook also has HUD references in their chart, but more in groupings.

I appreciate that my boss(es) are looking for items that are are disallowed by IRS information but that are not actually tax law - I know they've taken this type of position in some sophisticated areas and have been successful arguing from that angle, but trying to track something down to the source is not always an easy task -
especially for items that are defined by what they're NOT rather than by what they ARE.

Just to throw another slant on the question (for one more go around) is there a code section that identifies what makes up cost basis in a real estate asset? That may be more on point than focus on deductions.

Thanks again.

[S T]

Code Section

Abby,

I have tried so hard to find you a code section reference, however, all I seem to be able to find is reference to the publications that you have already referenced.

I have found numerous posts, but so far not much else relating to an actual code cite.

I will keep looking as time permits. I did find a couple of Regulations, but didn't have time to review, so maybe will post those for you in a day or two.

Sandy

[abby]

Thank you, Sandy

As usual, your willingness to help goes above and beyond the call of duty.

I want to thank you and encourage you not to spend too much time! It's becoming clear that the code deals with this issue indirectly or something would have surfaced by now.

There are many folks out there wtih enough farmiliarity of the code that they can recognize the general topic by the number - I am not one of them, except for the ones that are used with some frequency, like sec 179, or 197 intangibles, etc

I'm thinking my boss is not going to get a code reference and I'll let him decide if he's going to follow the pub instructions or request more research.

That being said, if you find a regulation that's on point, I will, as always, be much appreciative of your efforts!

[S T]

Closing Costs

Abby,

See this link to AICPA http://www.aicpa.org/pubs/jofa/apr2006/goodman.htm

Initial tax basis. The usual supposition under IRC section 1012 is that cost represents the taxpayer’s initial tax basis. If the taxpayer rolled over a prior home-sale gain under pre-1997 law, the taxpayer’s initial cost basis must be reduced by this unrecognized gain.

Other items also factor into the initial tax basis—including all settlement and closing costs (Treasury regulations section 1.212-1(k)). IRS Publication 523, Selling Your Home, offers the following examples of such costs: abstract fees; charges for installing utility lines; legal fees (including fees for the title search and preparing the sale contract and deed); recording fees; survey fees; transfer taxes; owner’s title insurance; and any amounts the seller owes that the buyers agree to pay, such as certain real estate taxes, back interest, recording or mortgage fees, charges for improvements or repairs, or sales commissions.

Maybe this is what you are looking for.

Sandy

[Burke]

Often in writing tax code, Congress does not elaborate on areas that subsequently provoke questions about intent. It is the IRS' charged responsibility to apply and interpret the tax code for the taxpayer. When there are disagreements, Tax Court intervenes with rulings, etc. I think the logic for this position is, since loans are not part of the basis in purchase or sale of properties, neither should the costs of obtaining/discharging those loans be considered in calculating basis. I have a hard time explaining to a taxpayer sometimes that he had a large gain, when most of it went to pay off the mortgage(s), and "he didn't get anywhere near that kind of money."

[Corduroy Frog]

Section 263A

[QUOTE=abby;61594]Just to throw another slant on the question (for one more go around) is there a code section that identifies what makes up cost basis in a real estate asset? That may be more on point than focus on deductions.QUOTE]

Abby, I'm going to submit §263A for your reading pleasure. I don't think there is anything in this section that specifically addresses the cost basis, but it does give you statutory items that are not deductions and sheds more light on the subject.

I do think that a prohibition against deducting such an item does not prohibit adding that item to basis. None of us seems to point to any code or reg that defines the elements of basis. But lacking this, it would appear in similar fashion that no code or reg disqualifies such elements. The IRS does not like for us to think aggressively this way, but I think they do stop short of disqualifying costs which are ordinary and necessary.