Where to credit seller paid closing costs (I'm the purchaser)

Question

Okay, I bought a new rental property and had the seller pay 2% of closing costs (max allowed by my lender).  Under the new Closing Disclosure form (no longer the HUD form), it shows nothing specifically paid by the seller, it only shows up in the "Calculating Cash to Close" and "Summaries of Transactions" as the "Seller Credits".

So, for the purposes of calculating the items for "Amortization over the life of the loan" (30 yrs) vs "Depreciation over life of the structure" (27.5 yrs), where do I deduct the Seller Credits?  Do I get to pick?  Does it just reduce the overall cost of the property (thus only a portion gets depreciated, as a portion would go towards the land)?

Account Closed · Answer

@Jack Forester

Hello Jack,

The seller credit cannot offset the purchase price unless its mentioned in the contract. Usually what we see on a purchase contract is seller contributing X% towards total closing costs. In that case it can only be used to offset your closing cost and prepaids.

If your closing cost and prepaids comes out to be lesser than that of the seller credit, then we show the seller credit same as the total closing cost as we can't go above that.

Brandon Sturgill · Answer

@Jack Forester not following...you said the seller credit showed up on the disclosure...so what is the issue?

You wouldn't deduct seller credit that was applied at closing. Any other depreciation issues should be directed to a qualified CPA...

Susanita VanGood · Answer

Hi @Jack Forester, I have the same question. Did you ever get an answer? I am trying to figure out how I apply the closing costs paid by the seller on a rental property. Do I allocate the credit to each category or can I select a category? I assume I need to record the escrow so that doesn't leave much left to amortize:

Escrow $2,399 (prepaid property tax/insurance)

Loan Fees $1,576 (origination fee, credit report, flood cert, doc fees)

Other closing costs (title fee, etc) $3,996

Total $7,971

Seller pd $5,000 of closing costs, where do I apply it for tax purposes?

Net $2,971

I assume I want to record the escrow at $2,399 so that only leaves $572. Can I choose whether that amount is classified as loan fees to be amortized over the loan period (5 years) or do I need to include it in basis/other closing costs (27.5 years)?

Thanks.

Jack Forester · Answer

Okay, Account Closed, based on what you are saying, it would go towards closing costs which are normally amortized over the life of the loan (Loan Origination Fee, Loan Discount, Appraisal Fee, Credit Report, and other origination charges), rather than the depreciated line items (Title Charges, Recording Fees, Survey, Pest Inspection).  Right?  If I applied it to things like Title Charges, I'd effectively be decreasing the cost/basis of the property, right?

Account Closed · Answer

@Jack Forester

If you are talking about your APR here -Then yes it will be less when you put seller credit towards Origination fee as most of the title charges are not included in APR.

But, If you go ahead and calculate it's the same amount what you end up paying whether you put $2600 towards origination or you put it towards title fees. It will only change your APR on papers.

Lender's will use such seller credits to itemize the APR charges on your closing disclosure so that they won't exceed .125% than that of what disclosed in Loan Estimate. So first they try to offset origination fees, then daily prepaids and then then escrow fees. If still you have enough credit - they will put it towards non APR  fees like title policy, examination, property taxes, insurances etc.

Account Closed · Answer

@Jack Forester, No - It can go towards all the closing costs - Including Origination Fees, Points, 3rd Party Fees (Appraisal, Credit, Survey etc), Title Fees, Recording Fees, Prepaids etc.

It cannot just exceed total closing cost. Say your Seller Credit is 12K and Closing cost is 8K. Then your final closing disclosure will show Seller credit of 8K instead of 12K. Because it can only go towards your closing cost.

Jack Forester · Answer

I'm talking about amortization and depreciation on Schedule E tax forms.  I guess I should have put that in the original post. Perhaps it wasn't as obvious as it sounded inside my head. 😉

Jack Forester · Answer

I'm talking about amortization and depreciation on Schedule E tax forms.  I guess I should have put that in the original post. Perhaps it wasn't as obvious as it sounded inside my head. 😉

Jack Forester · Answer

Ok, so pick which one pays back faster. If I reduce origination fees by $2600 on a 3 yr mortgage, then the title insurance charges are not reduced, and they are depreciated over 27.5 years.

If I apply the $2600 towards title insurance , then I can amortize the origination fees over the 3 yr loan life and get much larger deductions up front.

No all closing costs are treated equally .

Make sense?

Jack Forester · Answer

No, just $2600. Makes sense, just reduce the purchase price.

Where to credit seller paid closing costs (I'm the purchaser)

Most Popular Reply