Video instructions and help with filling out and completing Fill Form 4797 Pros

Instructions and Help about Fill Form 4797 Pros

Hi everyone my name is Anthony Fontana I'm an iris enrolled agent with ei tax resolutions and if you just bought a rental property you're gonna need to check out this video to find out the cash treatments of the various closing costs found on your closing statement alright now before we go line by line through the closing statement I got to discuss the three various taxing categories that these closing costs may fall under now those three are the basis adjustment a rental expense or capitalized costs that result in in amortization expense now I know this sounds like a lot of tax jargon and that's why I'm gonna go through these one by one for you guys okay the first category we have here for tax treatment on the closing statement is the basis adjustment now we need to know what the basis adjustments are because when we go to sell the home this is going to come into the calculation of figuring the capital gain or losses that you may have to pay tax on when you sell so first of all what is the basis the basis is your purchase price plus or minus these basis adjustments that we're gonna find on the closing statement plus the improvements that you may make to the home - any depreciation expense you've taken throughout the years is going to be what we call the adjusted basis now the adjusted basis is going to go into that capital gain or loss calculation which we have over here now the calculation is pretty straightforward it's the selling price they sell the home - any selling expenses which you're gonna find on the closing statement when you sell the home - your adjusted basis which we have from over here it's gonna give your capital gain or loss and you may have to pay tax on that capital gain or loss so obviously keeping track of these basis adjustments is really gonna help you when it comes time to sell this rental property to make sure you're not gonna pay too much in tax okay the second category for tax treatment on the closing statement is rental expense now these are pretty straightforward and they're gonna benefit you in the current year so you're definitely gonna want to make sure that you get these down now for the most part we're gonna have to reconcile the rental expenses found on the closing statement with the IRS Form 1098 which is going to be issue at the end of the year now again this is going to be a current year tax deduction and it's gonna go on the Schedule II of your current year's tax return and the way the Schedule E works is pretty straightforward it's just your rental income minus your various rental expenses some of which are found on the closing statement and that's going to get your rental profit or loss which you may or may not have to pay tax on so these are very key you know to make sure that we get down so we're not to pay as much tax in the current year okay so the third and final category for tax treatment of the closing costs or capitalized costs now these are normally costs that are associated with your mortgage and what we get to do with these is what we call amortize them over the life of the loan or the mortgage so let's say at the end of the closing statement we figure that we have $100 of capitalized costs and we have a 30-year mortgage that we've entered into what we're gonna do is get that hundred dollars divided by the 30 years of the mortgage and you're gonna get three dollars and 33 cents a year and this is going to be what we call an amortization expense and this amortization expense is going to go on your schedule II that we just saw earlier as a rental expense so obviously this is key that we get this accurately so we make sure we're paying the correct amount in tax each year for the life of a loan all right now that we know the three various categories of tax treatment found on the closing statement I'm gonna go line by line with you through a closing statement and let you know which line falls under which category okay so this is one of the more common closing statements used when purchasing a rental property it's called the settlement statement hud-1 this template is issued by the US Department of Housing and Urban Development as we can see their little logo up here and as you can also see I've highlighted the three categories for tax treatment on the top up here so whenever you see a line item that has been highlighted with the respective color here you can treat that cost accordingly all rights to jump right in we're going to go to line 101 which is the contract sales price here this is the price you purchased a home for and it is the start of your basis line 102 is personal property like any furniture in the home when you purchased it again will be added to your basis line 103 we are going to skip over for now as this is a combination of few line items found on the second page okay so line 106 threw 108 right here look very similar to line 210 BT 12 down here however the section 100 up top shows items paid for seller in advance whereas section 200 shows items unpaid by seller I have highly highlighted them two different colors because it depends on which section is greater to determine how to treat the amounts you will need to take the difference between the two sections respectively so lines 106 - line 210 down here and so on so if section