How to Split Closing Costs Between Land and Building for Real Estate Tax Depreciation?

Thanks for the clarification. I'm in a similar situation but my property is 70% building, 30% land according to the assessment. Would I use those percentages to split my closing costs too? Also, how do you handle costs like inspection fees or appraisal fees? Do those get split the same way?

Yes, you would use the same 70/30 split for your closing costs - so 70% of closing costs would be allocated to the building and 30% to the land. This maintains the same proportional allocation across your entire investment. Regarding inspection fees, appraisal fees, and similar costs - these are considered part of your acquisition costs and should be split between land and building using the same ratio. The only exception would be costs that are clearly tied to just the land (like a land survey) or just the building (like a specific building inspection).

How exactly does that work? Do they just tell you how to allocate everything or do they actually do the calculations for you? I'm terrible with numbers and I'm worried I'll mess up my depreciation even if I know the concept.

I'm skeptical. How is this better than just asking my CPA? My guy handles all my rental properties already and knows all the rules. Does this service have actual tax professionals reviewing your documents?

They give you both the allocation guidance and do the actual calculations. You upload your settlement statement and they break down each line item showing exactly what goes where. They give you a complete depreciation schedule you can use going forward, with all the math done correctly. Really helped me with the numbers side since I'm not great with spreadsheets. They definitely have tax professionals. You're not just getting automated responses - you get detailed explanations about why certain costs are handled differently. They caught nuances my previous accountant missed, like certain transfer taxes that should be handled differently than regular closing costs. The analysis is much more thorough than what I got from my regular tax person.

Wait, this actually works? I've spent HOURS on hold with the IRS trying to get answers about rental property depreciation. How much does the service cost? And are you talking to actual IRS agents or just people who know about tax stuff?

This sounds fake. There's no way to "skip the line" with the IRS. Everyone knows their wait times are terrible because they're understaffed. No service can magically make an IRS agent available when thousands of people are waiting.

Yes, you're connected with actual IRS agents - the same ones you'd eventually talk to if you waited on hold for hours. The service just handles the waiting for you. You get a call back when they're ready to connect you with the next available agent. I was skeptical too, but it legitimately works. I don't want to discuss specific pricing here, but you can check their website for current rates. What I can say is that the time saved was absolutely worth it for me - I needed answers about specific closing cost allocations before filing a return for a client.

I've heard about cost segregation but isn't it really expensive? I only have one small rental property worth about $200k. Is it even worth it at that price point?

Cost segregation studies typically make sense for properties valued at $500k or higher, as the fees can range from $3k-$10k depending on property size and complexity. For a $200k property, the cost might outweigh the tax benefits. A simpler alternative for smaller properties is to separately track and depreciate obvious personal property components like appliances (5-year property) and landscaping improvements (15-year property). You won't get as aggressive a breakdown as with a professional study, but you can still accelerate some depreciation without the high cost of a full study.

I use QB for my rentals. Here's my setup: I create two fixed asset accounts - one for the land (non-depreciable) and one for the building. I enter the purchase as a split transaction with the appropriate amounts to each account. For closing costs, I use the same split percentage. Then I set up the depreciation item only on the building portion. Works great for me!

This is really helpful! I'm just starting out with rental property investing and the depreciation rules seem so complex. Quick question - you mentioned the "mid-month convention" for the first year. Does that mean I can only claim half a month of depreciation for the month I purchased the property, regardless of what day of the month I actually closed? Also, when you say to keep good records of the land/building split, what specific documentation should I be saving? Just the tax assessment, or are there other documents I should keep with my tax records?

@Charlotte Jones Great questions! Yes, the mid-month convention means you treat the property as being placed in service in the middle of the month you purchased it, regardless of the actual closing date. So if you closed on March 3rd or March 28th, you d'still calculate depreciation as if you placed it in service on March 15th for that first year. For documentation, definitely keep your tax assessment showing the land/building breakdown, your settlement statement/HUD-1 showing all closing costs, and any appraisal if you have one. I also recommend creating a simple spreadsheet or memo explaining your allocation method and calculations - this shows the IRS you were thoughtful about the process if you re'ever audited. Some people also keep photos of the property condition at purchase and any improvement invoices separate from the original basis, since improvements get their own depreciation schedule. The key is being able to clearly show how you arrived at your numbers years later!

This is such important information about depreciation recapture! I had no idea that the IRS considers depreciation as "claimed" even if you don't actually take it. That's a huge gotcha that could cost people money if they don't understand it. Quick follow-up question - if I realize I forgot to claim depreciation in previous years, can I go back and amend those returns to claim it? Or is there a time limit? I'm worried I might have missed some depreciation on a property I bought two years ago when I was doing my own taxes and didn't fully understand the rules. Also, when you mention the 25% recapture rate, is that in addition to regular capital gains tax, or does it replace it for the depreciation portion?

@Mohamed Anderson Yes, you can absolutely go back and claim missed depreciation! You have a few options: 1 Amend) your previous returns Form (1040X within) 3 years of the original filing date to claim the missed depreciation 2 If) it s'been longer than 3 years, you can file Form 3115 Application (for Change in Accounting Method to) catch up on all the missed depreciation in the current year The depreciation recapture tax is IN ADDITION to capital gains tax, not instead of it. Here s'how it works when you sell: - The depreciation portion gets taxed at up to 25% recapture (rate -) Any remaining gain above your original purchase price gets taxed at capital gains rates 0%, (15%, or 20% depending on your income So) if you bought for $100k, claimed $20k in depreciation, and sold for $150k: - $20k gets hit with recapture tax up (to 25% -) $30k gets regular capital gains treatment - Your adjusted "basis for" the sale is $80k $100k (- $20k depreciation Definitely) look into catching up on that missed depreciation - it s'free money you re'leaving on the table!

This is exactly the kind of advice I wish I had when I started! I'm just getting into real estate investing and the tax implications are honestly pretty intimidating. Your point about getting professional help upfront really resonates - I've been trying to DIY everything to save money, but it sounds like that could be penny wise and pound foolish when it comes to depreciation. Quick question about the appraisal approach - if the tax assessment shows a really different land/building split than what an appraisal shows, which one should take precedence? And would getting an appraisal specifically for tax allocation purposes be expensive, or could I use the same appraisal I got for the mortgage? Also, when you mention "immediately deductible expenses" versus acquisition costs, could you give an example? I'm trying to understand which of my closing costs might fall into that category versus needing to be capitalized and depreciated.

@Freya Ross Great questions! For the appraisal vs. tax assessment issue, you can use either as long as you re'consistent and have reasonable support for your choice. If there s'a significant difference, I d'lean toward the appraisal since it s'more current and market-based, but document your reasoning clearly. Your mortgage appraisal might work, but many don t'break down land vs. building values - they just give a total property value. You might need to request a specific allocation from the appraiser or get a separate opinion. Some appraisers will provide this breakdown for a small additional fee. For immediately deductible vs. capitalized costs, here are some examples: - Property taxes and insurance prorated at closing: usually immediately deductible as operating expenses - Recording fees, title insurance, survey costs: typically capitalized added (to basis -) Loan origination fees, points: amortized over loan life, not added to property basis - Attorney fees for the purchase: capitalized - Property inspection fees: capitalized The tricky part is that some costs could go either way depending on the specific circumstances. This is where having a real estate-savvy tax pro really pays off - they can review your actual closing statement line by line and tell you exactly how to handle each item. Trust me, getting this right upfront is so much easier than trying to reconstruct everything years later!

This is such valuable advice about the Section 179 deduction! I had no idea you could potentially deduct appliances and other personal property in the first year. That could really help offset some of the upfront costs of getting into rental property investing. Your point about planning ahead during the purchase process is spot on. I'm actually in the middle of buying my first rental property right now (closing next week!) and this thread has been incredibly helpful. I'm definitely going to ask my attorney to walk through the settlement statement with me line by line before we close so I understand exactly what each cost represents and how it should be handled for tax purposes. The idea of cross-referencing your tax assessment against recent comparable sales is brilliant - I hadn't thought of that but it makes total sense to validate that your land/building split is reasonable. Did you find any significant discrepancies when you did that comparison? And if so, how did you decide whether to stick with the assessment values or adjust based on the market data? Thanks for sharing your experience as someone who just went through this process!