I bought a house in 2003, refinanced it in 2009, 2012 and 2018. I converted the property to rental In 2019. Can I amortize the refinance cost other than discount points (all those application fees, appraisal, reporting, underwriting, etc.)? Those costs are amortizable for rental property but are not amortizable for personal property, so I haven't written them off in any way during the period of personal use. Can I add them to the amortization report now, when the property is converted? If so, can I amortize the cost of only the most recent refinance or all prior refinances, including the original purchase? And if not, is there any other way to take advantage of those prior costs, either now or when I sell the property?
Can I add them to the amortization report now, when the property is converted?
Yes. The program "should" do that for you. But with an initial finance followed by two refi's, I question the ability of the program to do it correctly. I do know the program will take care of everything on the initial purchase with no problem.
If so, can I amortize the cost of only the most recent refinance or all prior refinances, including the original purchase?
Doesn't work that way. If this property had been a rental from day 1 when you purchased it, the amortized costs from that initial purchase would have been fully deducted in the tax year of that first refi, and the amortizable refi costs would then be amortized from that point forward. Then on the 2nd refi the amortized cost from the first refi would have been fully deducted in the year of that 2nd refi, and the amortizable cost of that 2nd refi would then be amortized.
If the program handles this correctly (I have no reason to think it won't, but the problem with confirming that is that the depreciation/amortization section of the program is not completed yet) then it "should" take care of this for you. However, at this point in time I wouldn't bet my first born on it.
What follows is information you will need, (I guarantee it) assuming this is your first time dealing with rental property taxes on your own.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
Thanks a lot! Just to sum it up to make sure I understand correctly. I can put on amortization the most recent refi even though it took place in a year prior to converting to rental. However, I cannot do the same with prior refies? And I won't be able to deduct those unamortized costs of earlier refies during the sale of property either. Did I got it correctly? Does the fact that all those refies were with the same lender change anything?