Investors & landlords

You can take the $2,500 and multiply it by the 27.5 year recovery percentage for years 1-3 (2018, 2019, 2020).  Then use the balance as a deduction on your 2021 tax return for the remainder of the refinance costs from the original lender.

Next change the cost basis of the rental property by reducing it by the $2,500 (your number).  It will not affect any of the depreciation going forward because this portion of the asset has been and will be accounted for in 2021. It's not something you will have to remember except for the reason you changed the cost basis of the rental building in 2021.  Keep your records with your tax return.

Lastly, calculate the deduction for 2021 by taking the $2500 minus the depreciation you already used in the prior years. You can enter this as a miscellaneous expense on the rental property with a description.

The 27.5 year chart is provided below to help you with the calculations (add the three years percentages together and multiply by the refinance cost amount).  1.667% + 3.636% + 3.636% = 8.939%