Hello... I'm in need of some help. Hopefully one of the experts out there can guide me in the right direction...
I own two rental properties. One acquired in 2017 and the other in 2019. Both have always been used as rental properties. When I originally purchased the properties my CPA (no longer using him) added my closing costs to the cost basis of each property and depreciated them over 27.5 years. Based on what I have read, I believe that this is incorrect, and some of the closing costs (those tied to the loan and not the property - such as points) should have been added as an "intangible asset" and amortized over the life of the loan (15 years).
Flash forward to 2021, I refinanced both properties.
When I refinanced, I created two assets for each property, one for the property related closing costs (title fees, settlement fees, etc.) amortized over 27.5 years and another for the loan related closing costs (points, appraisal fees, etc.) amortized over 15 years. However, I now believe this was incorrect, and the property related closing costs should just have been added to the property's cost basis. I couldn't figure out how to do that at the time, but I think the correct way is simply to go to the property and add that amount to the field marked "cost", rather than creating a new asset for it amortized over 27.5 years.
I'm not too worried financially, as the tax implications of these changes are minimal (if any) but I would like things to be correct so I don't run into any problems down the road.
My questions are as follows:
- What should I do about the initial error by the CPA when I bought the properties in 2017 and 2019? Do I need to go back and figure out which closing costs should have been depreciated (27.5 years) and which should be amortized and then make the changes in Turbo Tax? I don't think it will make a material difference, and I am not excited about the possibility of filing 6 amended tax returns. Advice here would be welcome. I believe any financial change would be in my favor, not the IRS.
- If I do the above, I am assuming those purchase loan expenses amortized over 15 years would have to be fully amortized on my 2021 return when I did the refi. I would then create a new asset amortized over 15 years for the refi (different lender).
- Can someone please confirm my understanding of the difference between items added to cost basis, vs amortized over the life of the loan (15 years) vs amortized over 27.5 years? When acquiring a new property (as opposed to refinancing), am correct in thinking that only those associated with the property are added to the basis, and the others are added as an asset to be amortized over the life of the loan. I'm about to buy a third property and want to set things up correctly from the start this time.
Any help or support would be much appreciated 🙂
Thanks,
Matt.
