[marinaavet]

The business bought an office building to conduct their business. The escrow statement includes Loan Fees. Do they get added to the basis of the building or do they get expensed or amortized?

[AtlantaTaxExpert]

Loan fees are an expense of the purchase and thus are added to the basis of the building to be capitalized.

[marinaavet]

That's what I thought too, but today I read this on the IRS website - " Your basis includes the settlement fees and closing costs for buying property. You cannot include in your basis the fees and costs for getting a loan on property" . Also reading further, it says " Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan." Here is the link Publication 551 (07/2011), Basis of Assets jump to real property paragraph. Let me know how you understand this... I am confusing about contradicting statements saying it cant be added to the basis but then its saying it must be capitalized. So by "capitalize" do they mean to added to the basis or just amortized over the loan period?

And I am referring to SBA loan costs from the escrow statement such as appraisal fees, SBA guarantee fees, loan packaging fees. I don't know if that makes any difference or not...

[marinaavet]

Also, check this out.. I found an article that breakdowns every charge by explaining if it should be added to the basis, or loan costs or expensed: GUIDANCE: This is a point of confusion for many. Loan Points paid on the purchase of a primary residence are fully deducted in the year paid. However points paid on the refinance of a primary residence are deducted over the life of the loan. For investment properties, Loan Points and Costs are always deducted over the life of the loan.

• 804. Appraisal fee – Added to Loan Costs
• 805. Credit report – Added to Loan Costs
• 806. Tax Service – Added to Loan Costs
• 807. Flood certificate – Added to Loan Costs
• 808. – 811 Other – Usually added to Loan Costs. Hard Money Lenders that withhold funds as a rehab escrow may use this line. These funds are treated Non-Deductible escrows until paid for rehab.

This is the link HUD-1 Accounting Guide | The Borg Firm It also has the JE at the end and loan cost line is listed separately as "other asset". What do you think?

[AtlantaTaxExpert]

This might be six of one and half a dozen of the other. It depends on the depreciation life of the building and the term of the loan.

However, the Borg Firm is a respected tax authority, so if they say amortize over the life of the loan, then do that.

[marinaavet]

Right. Well, the IRS reference link I posted earlier , I would think would be a reliable source, but its confusing to me as its saying it cant be added to the basis, but then its saying it should be capitalized. And "capitalized" for me means add to the basis and depreciate. How would you understand that?

[AtlantaTaxExpert]

Depreciation and amortization are both methods of capitalizing (spreading the cost over a number of years) expenses.

You depreciate THINGS, like buildings and cars.

You amortize financial costs such as loan fees, attorney fees, etc.

The net effect is the same.