The wording of "capitalized closing cost" by your former tax preparer is wrong, and that's what may be leading to your confusion and misunderstanding here.
Capitalized costs are depreciated over time. Understand that depreciation is not a permanent deduction. It's a reduction of the cost basis of the capitalized asset. That depreciated amount, which accumulates every year the asset is in service, has to be recaptured at some point in time. Most commonly, when you sell the asset. In the tax year you sell the asset, all prior depreciation is recaptured and you pay taxes on that recaptured depreciation.
Amortized costs are deducted over time. This is a permanent deduction and it never has to be recaptured. If you sell the asset and in the year of the sale it has not been fully amortized, then you get to "amortize", or deduct whatever remains, in the tax year you sell it.
Your closing costs are referred to as either Financing Fees, or in the case of a refi, Refinancing Fees. Here's the process to enter them correctly in the TurboTax program so they are amortized (not capitalzed) and deducted over time (not depreciated).
- In the Assets/Deprecation section click Add an Asset.
- Select Intangibles/Other Property and continue.
- Select Amortizable Intangibles and continue.
- For description, I suggest you enter Financing Fees or Refinancing Fees... whichever is more appropriate.
- For cost, enter the total amount of those fees you paid at the closing when you purchased the property.
-For date, that should be the date you closed on the sale of the property.
- Click continue.
- Select the option for "purchased new" and the option for "Yes, used 100% for business", enter the closing date of the sale, then continue.
- For code section select 163:Loan Fees and continue.
- For useful life in years, enter the term length of the mortgage loan. Typically 15 years or 30 years. Then continue.
- On the form 4562 from your 2019 return you have from the preparer, look in the Convention/Method column. If you see "HY" then select half year. Otherwise, select Mid-Quarter. Most likely, the correct selection will be half year. Then continue.
-What you see here is the amount already deducted in prior years. If this is wrong, then you need to go back a screen and change the convention used. To confirm this amount is correct, on the 2019 form 4562 add together the amounts in the "prior year" and the "current year depr" columns. That total should equal what you see on this screen. If it's off less than $5, that's fine. You can change that amount if you want to match what it should be. Then continue.
- NOw you see the summary. You can "show details" if you like. Then click the continue button, and you're done.
