tax treatment of closing costs

[Danny Shore]

What are the tax consequences for the following 100% residential rental situations?

1. seller paid closing costs
2. buyer paid closing costs
3. buyer tacks the closing costs onto his mortgage
4. what is the better scenario? having the seller pay $xxx or reducing the purchase price by that $xxx
5. what is a closing cost "rebate"

i assume for #1, the amount is capitalized (increases the tax basis) and depreciated over 27.5 years.

[Dave Toelkes]

1. Seller paid closing costs reduce seller's capital gain, and, reduce buyer's cost basis.

2. Buyer paid closing costs are added to purchase price, increasing buyer's cost basis.

3. Same as #2. Amount of financing (or lack thereof) is irrelevant; has no tax consequence.

4. Depends. Seller paid closing costs may facilitate a sale that might not have happened otherwise. Buyer gets property with less money out of pocket. Reducing the selling price may benefit both parties by reducing seller's capital gain and buyer gets a lower purchase price which may make loan qualification easier.

5. Don't know unless you tell us the context in which the term is used. Seller paid closing costs are usually called a "seller concession" and appear on the settlement statement as amounts paid by seller for buyer.

Your assumption would be correct for the buyer in #2. But for the buyer in #1, seller paid closing costs only reduce the buyer's cost basis. They do not get capitalized by the buyer and consequently do not get depreciated.