one of my clients run a property investment business as a sole trader and the aim of the business is to purchase distressed properties, renovate them and then let them out to generate rental income.
I believe that all the expenses related to the initial purchase (purchase price, stamp duty, solicitor fee, surveyor fee, etc.) and the renovation costs are capitalised (i.e. added to the the fixed asset account that relates to the property in question). However I'm unsure about the expenses directly related to the finance (i.e. mortgage broker fee and mortgage arrangement fee). Should they be capitalised as well or should they be recorded as revenue expenses and then 'spread' over the lifetime of the mortgage (e.g. 25 years) as 'prepaid' expenses?
The second option seems more appropriate to me as the cost relates to obtaining the finance and not to the property itself, however I'm unsure what would happen when the owner re-mortgages after say 3 years? There would be a new set of finance fees while 22 years worth of the previous set of fees would be still showing as 'prepaid'.
If anyone has experience working for property investment clients and can shed a light on this aspect it would be greatly appreciated.
Thank you very much.
Fabs
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The cost of arranging finance to purchase an asset are considered an expense for tax purposes. So from what you have said the mortgage arrangement fee can be expensed
