Most of your acquisition costs when acquiring a rental property are going to show up in the real estate closing statement. The closing statement is a financial instrument, not a tax document. You need to go through each line item in the statement and assign it to one of three following tax categories:

Basis

Loan acquisition

Operations

Then, once you have divided your expenditures into these three categories, you often need to consider the best tax strategies for each. For example, in the basis category, you assign costs to land, land improvements, buildings, and personal property. Each dollar assignment has an impact on your profits.

This article gives you a useful guide to strategies that will help you build your rental property profits on the day you close escrow.

1. Basis

In general, your basis is the total cost you pay for the property, including your costs of obtaining and perfecting the title. Once you have this total cost, you allocate that cost to land, land improvements, buildings, and equipment, and then you depreciate all but the land.

1.1 What Goes into Basis

Examine the closing statement to identify expenditures you should include in your basis. The following list gives you some of the items you usually would include:1

Contract price

Personal property

Abstract (title search) fees

Escrow fees

Legal fees (for the title search, sales contract, and deed, but not for the loan)

Real estate commissions (generally paid by the ... Log in to view full article.