Closing cost treated as an expense or capital item?

[Shehan Omantha]

[Jim Kennedy]

As several people have pointed out, some of your settlement sheet costs are capitalized and depreciated, some are expensed and some are none of the above. lets dig down a little more to see why each is what it is. 

Some items are written off this year fully. That's because of the matching concept of the Internal Revenue Code, which says you must match income and expense to the period in which it occurred. If you're a buyer, and you have that reimbursements of property taxes for the current quarter, that happens this year, and so you write it off this year. If you close before the end of the month and have interim interest for a number of days, that all happened this year too, and so that's also a current period expense. Got it? Okay.

Next are depreciable costs - these are the costs associated with the actual purchase of the house. Tittle insurance, legal fees,  and all the costs the title company charges you all get tacked on to the basis because they all helped you complete the buy (or sell). 

Last is none of the above. You may pau several months of taxes or insurance into escrow. They don't really count as expenses till disbursed, so they are currently non deductible. 

Hope that helps. Happy investing!

Jim Kennedy