What closing costs, fees, etc. are deductible from 203k project?

Question

I closed on a multi-family 203k project in Chicago that I am house hacking. Since I will be occupying, I understand I can only write off a portion of the expenses (presumably 75% since there are 4 floors and I will live on 1). Some questions:

• My accountant is saying that pretty much all closing costs and rehab expenses except interest and taxes paid will just be captured by standard 30 year depreciation. Is that accurate
• Is upfront mortgage insurance premium something that can be written off or is that also depreciable?
• Would the entire rehab cost be captured in general depreciation of the property or should I parse items out? Like, for instance, kitchen cabinets and bath vanities that probably won't last 30 years.
• I plan to purchase appliances for all the units. Would those be captured in the same rehab depreciation above or would I also separate those?
• Is I sold for a profit and met the threshold for occupying the property for 2 of the past 5 years, do I still get to not pay taxes on those profits or would that be different because it is currently a multi-family and I'm already taking deductions on expenses and depreciation on the units I am not occupying? So, essentially, I don't pay taxes on 25% of the profits since I occupied 25% of the building?
• To piggy back on #5 above, what if the scenario were that I de-converted the property into a beautiful SFH, still met the 2 of 5 year threshold (probably when it was a multi family but maybe not) and sold it for a profit?

Here are some line items that appears on my master statement that I paid for. I am curious to know if any of these are a write off versus depreciable:

• 203 (K) Supplemental Origination
• Application Fees paid outside closing
• Lender Fees
• Processing Fees
• 203 (K) Consultant Fee paid outside closing
• 203 (K) Architectural Fee
• 203 (K) Title Update Fee
• Homeowner's Insurance Premium
• Survey Fee
• Buyers Attorney Fee paid outside of closing
• Title - Escrow Fees, Policy Update Fee, Chain of Title Fee, CPL Fee, Overnight/Express Delivery Service Fee, Email Package Fee, Tax Payment Service Fee, Yadda Yadda Yadda Fee, etc.
• Permits
• Appraisal fee paid outside of closing
• Mortgage Insurance Premium to HUD

The main reason I am asking is because I track all of my expenses including an estimate of what I should be maintaining in reserves for expected income taxes.

Brandon Hall · Answer

@Eric La Pratt this really should be hashed out over a phone call. Too many moving parts. If you don't trust your current accountant, seek a second opinion.

None of the costs you listed at the end of your post are currently deductible with the exception of the PMI. The PMI is only partially deductible - the IRS takes the stance that the upfront PMI really covers several years, so you must deduct a portion of the PMI every year it's supposed to cover (generally seven years max).

1. Accountant is right.

2. Partially deductible, remaining capitalized and amortized each year.

3. Not unless the property is in service which is highly unlikely for a 203k property.

4. Not unless the property is in service which is highly unlikely for a 203k property.

5. Question isn't clear. If you meet the threshold for Section 121, you don't pay tax on capital gains up to $250k for your personal use (or portion thereof) property. If the home you sold was 75% used as a rental, then you may only use Section 121 for 25% of your old home.

6. If it was previously used as a rental, you will have to pro rate the exclusion - so you're still out of luck.

These are questions you need to run by a CPA who knows your situation. I suggest finding one and going over it with them.

Kwame Knights · Answer

@Brandon Hall , i have a similar situation, i'm buying a SF and converting an existing detached two car garage (800sq ft) into an in-law unit located in the back of the property. With the new tax law, is your answer still applicable to the following:

• 203 (K) Supplemental Origination
• Application Fees paid outside closing
• Lender Fees
• Processing Fees
• 203 (K) Consultant Fee paid outside closing
• 203 (K) Architectural Fee
• 203 (K) Title Update Fee
• Homeowner's Insurance Premium
• Survey Fee
• Buyers Attorney Fee paid outside of closing
• Title - Escrow Fees, Policy Update Fee, Chain of Title Fee, CPL Fee, Overnight/Express Delivery Service Fee, Email Package Fee, Tax Payment Service Fee, Yadda Yadda Yadda Fee, etc.
• Permits
• Appraisal fee paid outside of closing
• Mortgage Insurance Premium to HUD

In year two, how would the IRS treat the rental income and any repairs\updates to that in-law suite?

Eric L. · Answer

Answered my own question via IRS for anyone interested in this:

You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

https://www.irs.gov/publications/p530/ar02.html

Eric L. · Answer

Thanks again for the clarification.

Last question: In Chicago, we pay a tax to the city based on the cost of the transaction as a title transfer tax. It's substantial enough - mine was over $4k. Is that deductible or included in the total depreciation? Not sure since it is an actual tax.

Brandon Hall · Answer

@Eric La Pratt correct. When you refi, you get to currently deduct all costs being amortized that were associated with the old loan. Things like PMI, appraisal fees (if required by lender), lender title insurance, etc.

Eric L. · Answer

@Brandon Hall Your response is super helpful! Looks like my accountant was accurate which really helps bolster my trust in him. It just seems a bit wonky to my brain that some of these items are not directly deductible and only depreciable as they are directly related to the cost of doing business versus improving an asset. So as long as everything is captured eventually, I care less about getting it all in 2016 per se anyway. It would serve me better in years I am collecting more rent anyway since the property is not performing during construction.

I do have a follow up:

I am paying mortgage insurance monthly on the note and that is separate from the up front mortgage insurance required by FHA at closing. To be clear, what you are saying is that the up front mortgage insurance is captured evenly over appx 7 years and my monthly mortgage insurance is just captured in the tax year it is paid? What happens when I refi out of my currently mortgage product in about a year and consequently drop the monthly insurance - do we then keep on the 7 year schedule for the up front deduction or is that taken all at once since there is now no requirement?

What closing costs, fees, etc. are deductible from 203k project?

What closing costs, fees, etc. are deductible from 203k project?

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