Closing Costs on Purchases of Personal Residences
| Publication year | 1979 |
| Pages | 1231 |
1979, July, Pg. 1231. Closing Costs on Purchases of Personal Residences
The purchase of a personal residence is one of the most important investments a person can make. The attorney, as advisor to such matters, should therefore be aware of the important tax consequences which result from the purchase of a personal residence. The characterization and treatment of certain costs incident to the closing of a purchase of a personal residence can provide tax savings to the purchaser. This column sets forth the treatment of such items and discusses certain problems which may be identified and avoided in the purchase of a personal residence.
Closing costs can essentially be broken down into three categories. First, there are certain non-deductible costs that can be capitalized pursuant to § 263 of the Internal Revenue Code of 1954, as amended (hereinafter referred to as the "Code"), and added to the purchaser's basis in his personal residence pursuant to § 1016 of the Code. Second, there are non-deductible personal costs that cannot be capitalized. Finally, certain expenses are specifically deductible by the purchaser of a personal residence.
The attorney who advises the client in the purchase of a personal residence should identify the capitalized costs and deductible costs in order that such costs may be properly treated by the client. Not only does this aid the client in preparing his tax returns, but in some instances it may save the client money if problems are identified prior to the closing.
Most costs associated with the purchase of a personal residence cannot be deducted by the purchaser. However, since the Code treats the purchase of a personal residence as an investment in an item of real property, certain nondeductible items may be added to the cost basis of the property. Such items will therefore be recoverable upon the ultimate sale of the property as a return of capital.(fn1) Accordingly, no tax will have to be paid on the value of such items. If the client ever converts the personal residence to business use by renting the property or a portion thereof, such costs will also be considered a part of the depreciable basis of the property.(fn2) Items that are non-deductible expenses which may be capitalized include the following:
1. Title Insurance---premiums, abstracts, legal opinions, title examination fees and other costs related to the acquisition of title insurance.(fn3)
2. Recording Fees---documentary fees and recording fees for the recording of the Note and Deed of Trust and other documents.
3. Tax Certificate---cost of a certificate of taxes due.(fn4)
4. Survey Costs---engineering, survey and similar evaluation costs.(fn5)
5. Appraisal Fee---appraisal and similar costs.(fn6)
6. Attorneys' Fees---costs of obtaining legal opinions and advice.(fn7)
Items which are capitalized and added to basis pursuant to § 1016 essentially increase the cost of the...
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