HUD.1 and accounting, for the taxman cometh
What is the general principle behind accounting for real estate investing (long-term), especially with regard to the line items on a HUD.1 purchase settlement statement.
Which items are expensable in the year purchased, which are expensable in the year of disposition (adds to cost basis), which are depreciatable (and therefore, recapturable at disposition), and which are merely transfers between like accounts (ie: equity)?
I've done quite a bit of googling and reading, but haven't yet found a summary of HUD.1 line item to category matchups.
Thanks!
-andy
andy,
This is not an accounting forum, and I am not an accountant so I will not attempt to figure out the debit cash, credit owner's equity entries.
I can give you some suggestions, however, on how you would deal with the tax treatment for the settlement statement items.
Generally, anything that is an acquisition cost can be added to cost basis. In addition to your purchase price. Acquisition costs include (but are not limited to) recording fees, tax stamps, title insurance, lawyers fee, courier fees, survey, appraisal, buyer's agent commission, and termite inspection.
Generally, ownership costs are not added to basis, but are expensed on your Schedule E. Interim mortgage interest, hazard insurance, prepaid property taxes, homeowner's association fees are just some of the likely costs of ownership that can be expensed on Schedule E for rental property.
Generally, financing costs can also be expensed. Things like loan origination fees when charged as a percentage of the loan amount and mortgage discount points are deducted as other interest on your Schedule E. But, if the loan is a refinance, points and loan fees are added to the cost basis and depreciated over the life of the loan.
Your depreciation basis starts with your cost basis. Next you subtract the value of the land because land can not be depreciated. The amount left is attributed to the cost basis of the improvements only and is your basis for depreciation.
While I have given you the general guidelines, more agressive taxpayers may choose to expense items that others would add to basis.
Hope this helps.
[ Edited by DaveT on Date 02/12/2003 ]