The 1025 tax form isn’t a tax form. Form 1025 is Fannie Mae’s Small Residential Income Property Appraisal Report, used by lenders to value two- to four-unit residential properties when someone applies for a mortgage. Freddie Mac uses the identical form and calls it Form 72. It shows up in tax conversations because the appraised value on it feeds directly into your depreciation basis and, eventually, your capital gain when you sell.
What Form 1025 Actually Is
A licensed appraiser completes Form 1025 when valuing a duplex, triplex, or fourplex. Fannie Mae requires it for “traditional appraisals of two- to four-unit properties (including two- to four-unit properties in PUD, condo, or co-op projects) based on interior and exterior property inspections.”1Fannie Mae. Appraisal Report Forms and Exhibits Freddie Mac requires the same form under its own numbering as Form 72.2Freddie Mac. Conventional Appraisal Report Forms
You’ll encounter it any time you buy, refinance, or take out a home equity loan on a small multi-unit property. It establishes two things the lender needs: the property’s market value and its income-producing capacity. Single-family homes use a different form (Form 1004) because there’s no rental income to analyze. Form 1025 adds an entire income analysis section, which is why multi-unit appraisals take longer.
How Form 1025 Affects Your Taxes
You don’t file Form 1025 with the IRS. What it does is generate the numbers you’ll rely on for years of Schedule E filings and, eventually, the sale.
Depreciation Basis
You report rental income and expenses on Schedule E, including an annual depreciation deduction that lets you recover the cost of the building over time.3Internal Revenue Service. Instructions for Schedule E (Form 1040) Residential rental property is depreciated over 27.5 years using the straight-line method.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
You can only depreciate the building, not the land it sits on. Form 1025 typically includes an allocation between land value and improvement value, and that split becomes your starting point for the depreciable basis. If the appraisal shows $400,000 total with $100,000 attributed to land, you depreciate $300,000 over 27.5 years, roughly $10,909 in annual deductions.5Internal Revenue Service. Publication 946 – How To Depreciate Property
Basis at Sale
When you sell, your capital gain is the difference between the selling price and your adjusted basis. That adjusted basis reflects the depreciation you claimed year after year, all of it traceable back to the allocation on the original appraisal. Some owners also use the Form 1025 valuation to challenge local property tax assessments, though success varies by jurisdiction.
Documentation to Give the Appraiser
The appraiser does the technical work on the form, but the numbers depend on records you provide. Have the following ready before the inspection:
- Current leases for every unit, showing monthly rent, terms, and occupancy status. If a unit is vacant, note how long it has been empty.
- Operating expense records from the previous twelve months: property tax bills, insurance premiums, maintenance invoices, and any management fees.
- Utility bills for water, electric, gas, and trash, especially where you pay on behalf of tenants. Whether units have separate meters matters for the valuation.
- Floor plans or blueprints showing total square footage, unit layouts, and basement finish levels.
Accurate expense records matter more than most owners realize. The appraiser subtracts operating costs from gross rent to arrive at a Net Operating Income figure. If your records are incomplete, the appraiser estimates expenses using market data, which often produces a less favorable number than your actual costs would support, and that number flows into the value that anchors your tax basis.
How the Value Gets Calculated
The first portion of the form covers the physical property: construction type, condition, zoning compliance, and site details. The appraiser identifies comparable sales from similar multi-unit properties that have recently sold nearby, then records adjustments for differences in location, condition, size, and amenities in a grid.
Fannie Mae requires the income approach for all two-to-four-unit valuations, though it can’t be the only method used.6Fannie Mae. Cost and Income Approach to Value The appraiser gathers comparable rental data to establish what your units should command, then calculates a Gross Rent Multiplier: the ratio of sale price to gross rent for comparable properties. If similar buildings in the neighborhood sold for roughly eight times their annual rent, the appraiser applies that multiplier to your property’s projected rental income. The lender compares this income-based estimate against the comparable-sales estimate to check whether the loan amount fits what the property actually earns.
If the Appraisal Comes In Low
A low value on Form 1025 causes trouble both immediately and later. The lender won’t approve a loan large enough to cover the full purchase price, and the lower basis will shrink your depreciation deductions for years. You generally have a few paths forward:
- Negotiate a lower price with the seller to match the appraised value.
- Increase your down payment to bridge the gap in cash.
- Challenge the appraisal if your agent identifies an error or a clearly inappropriate comparable. Without a well-documented reason, lenders rarely agree to a second appraisal.
- Use an appraisal contingency in your contract to walk away without losing your earnest money.
Low appraisals happen more often with multi-unit properties than single-family homes because good comparables are scarce. Only a handful of similar duplexes or triplexes may have sold recently in your area, forcing the appraiser to pull from a wider geography or make larger adjustments.
Extra Hurdle for FHA Buyers on Three and Four Unit Properties
If you’re using an FHA loan to buy a triplex or fourplex, Form 1025 alone isn’t the end of the analysis. The property must also pass a self-sufficiency test: the net rental income from all units, including the one you plan to live in, must equal or exceed your total monthly mortgage payment, including principal, interest, taxes, insurance, and the FHA mortgage insurance premium.7U.S. Department of Housing and Urban Development. HOC Reference Guide – Rental Income
Net rental income for this test uses the appraiser’s estimate of fair market rent for all units, then subtracts a vacancy factor of 25 percent or a higher rate if the appraiser determines one. The self-sufficiency requirement does not apply to duplexes, only to three and four-unit properties. FHA also requires borrowers on three or four-unit purchases to have at least three months of verified mortgage payment reserves after closing, and those reserves can’t come from gift funds.7U.S. Department of Housing and Urban Development. HOC Reference Guide – Rental Income