Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
I refinanced my owner-occupied multifamily rental property last year and now I'm struggling on exactly how to report the closing costs. I have tried researching previous posts and other sources, but I haven't found anything that is directly related (Im not asking about the personal portion, a cash out, etc).
So one thing says to amortize the points, but that's just a small portion. Another thing says to amortize anything that had to do with processing the loan. Another thing said that credit report and appraisal fee doesn't count.
Also, would it be its own line that starts depreciating as of the date of the refinance (settlement or disbursement date?) or do I add it to the original basis? But what about the years of depreciation that already passed?
And then would the land basis be based on the original purchase date or what the ratio is at the time of the new loan?
Thanks so much. Every year, depreciation is the bane of my existence. I thought I had it under control but then I had to go and refinance. ;)
Okay, that is helpful. I'll have to poke around the H&R Block software to figure out where I'm supposed t report amortization.
Regarding the deduction, do I take what the loan costs were, subtract what has already been depreciated in prior years, and then deduct it...where? Is it on the Schedule E as "other expense"? Is it also reportable on Schedule A? Or do I need to save that for when I move out one day and convert my unit to rental?
I agree with @Michael Plaks , but remember, if you are refinancing with the same lender, you cannot deduct the unamortized (remaining) old points. The old points will be amortized over the term of the new loan.
Also, I feel like you might be confused with the depreciation of your property.
The basis of the depreciation for your property is not evaluated every year ( even with refinance). Basis is what it was when you placed in service. If you do any improvements, those are depreciated as a new asset. The old depreciation of the actual property is not changed unless you do partial disposition of your property.
So, refinance does not alter your depreciation. It affects the interest deduction and amortization of the point, not the depreciation.
You're right, I AM confused. I did not have any points on my old loan. I didn't think the basis would be adjusted, but @Michael Plaks
said to deduct the old loan costs, and doesn't make sense that I would be deducting them while they are being depreciated. So do I only deduct points (none, in my case), but not all costs (since the title insurance and recording charge are included in the property basis)?
My new loan has points, so I'll amortize those - is it only the rental portion, as with the depreciation of the building?
I'm not even sure my new mortgage has points. Everything I read says that a point is 1% of the loan amount. The statement says ".125% of Loan Amount (Points)" and the amount next to it is .125%, not 1%. So I think it might be something else, and not amortizable?
Even before starting, if this is owner-occupied, you have to prorate the rental portion of the expenses and basis.
First I think it would be helpful to understand what goes into determining the depreciable basis of your property.
This is directly from IRS:
Your basis includes the settlement fees and closing costs for buying property.
A fee for buying property is a cost that must be paid even if you bought the property for cash.
The following items are some of the settlement fees or closing costs you can include in the basis of your property.
Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including title search and preparation
of the sales contract and deed).
Recording fees.
Surveys.
Transfer taxes.
Owner's title insurance.
Any amounts the seller owes that you agree to pay, such as back taxes or interest,
recording or mortgage fees,
charges for improvements or repairs,
and salescommissions.
Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
You cannot include in your basis the fees and costs for getting a loan on a property. The following items are some settlement fees and closing costs you cannot include in the basis of the property.
1. Casualty insurance premiums.
2. Rent for occupancy of the property before closing.
3. Charges for utilities or other services related to occupancy of the property before closing.
4. Charges connected with getting a loan.
The following are examples of these
charges.
a. Points (discount points, loan origination fees).
b. Mortgage insurance premiums.
c. Loan assumption fees.
d. Cost of a credit report.
e. Fees for an appraisal required by a lender.
5. Fees for refinancing a mortgage.
For your rental property items (1) through (3) are deductible as business expenses in the year you incurred them.
Items (4) and (5) are loan cost and must be capitalized as costs of getting a loan and can be deducted over the period of the loan.
So the loan cost (including points) that you have to amortize over the term of the loan is the issue when you refinance.
1) Loan Cost including the point that has not been amortized as of the refinance, can be deducted right away. However, if with the same lender, the point ( not loan cost) cannot be deducted right away, it has to be amortized over the term of the new loan)
2) The new loan cost and a point will be amortized over the term of the new loan.
The refinance is does not change the depreciation basis of the property.
To answer your specific question:
"What do I do with the rest of the loan costs?
appraisal (- added to basis if you initiated it for your due diligence, but if bank required it- it is loan cost), credit report - (loan cost), flood certification - (added to basis), tax registration (- basis)
Title insurance & escrow fee - (added to basis)
recording fees - (added to basis) "
Regarding points, shoot a quick email to your lender, they will be more than happy to clarify it.
If this is confusing, please dont hesitate to PM me, I am more than happy talk to you over the phone.
For your refinance (with no cash out), loan points charged as an origination fee or to discount the rate are amortizable. What you read is correct, a "point" is equal to 1% of the loan amount. In your case, you were charged one-eighth of a point (0.125%); however, the amounjt you paid in points is still amortizable.
If doing your own taxes with TurboTax, the amount you paid in refi costs that you are amortizing for your rental property is entered on your assset depreciation schedule as an "Intangible Asset".
In the Asset/Depreciation section for your rental prooperty,
Click the "Add an Asset" button
Select "Intangibles. Other property", continue
Select "Amortizable Intangibles" and continue
Label the new asset "Refi Cost", enter the amount and your settlement date, and continue
Select "Purchased New, YES, and. used (enter % of the total amortization cost that applies to your rentals) for business, continue. Because you are an owner occupant, only the percentage of the total cost of the refi that is attributed to your rentals is amortized as a rental asset; the rest might be a Schedule A entry but only if you itemize.
Select "163 - Loan Fees" from the drop down menu, continue
Enter the loan term in years, continue
Let TurboTax do its thing. You are done with this task.
If you did a cash out refi, you can not amortize loan costs for whatever portion of the loan proceeds that was not used directly for your property. Say you took $25K cash out of your $125K refinance and bought a new car for your personal use, while the rest of the proceeds was applied to your property. You can only amortize 80% of the total refi costs.
We were living in our house, bought in 2014, when we refinanced it in 2017. Moved out and rented it in 2019. It has been rented since 2019. Should our basis amount for depreciation be the original purchase price or the refinanced amount?
