Expensing Unamortized Fees for Cash Out Refi for Rental Property That Was Sold

[laquan]

In 2019, I did a cash out refi for my rental property.  Because 65.83% of the refi proceeds were used to pay down the mortgage of my personal home, it was my understanding that only 34.17% of the $7,522 refinancing fees (equal to $2,570) could be amortized as a rental expense over the 30-year mortgage period.  In my 2019 tax return, I entered $7,522 as the Cost of the refinancing fees and 34.17% as the Business %.  TurboTax correctly computed the pro rata amortization for 2019 (1/30th of $2,570 * 3 months = $21) and full year amortization for 2020 ($86).

On 5/11/21, I sold the rental property, and so I need to expense 4 months of amortization for 2021 ($29) and also expense the remaining $2,434 unamortized refinancing fees ($2,570 - $21 - $86 - $29).  TurboTax correctly carried forward the original $7,522 Cost and 34.17% Business % for this intangible asset to my 2021 tax return.  It also correctly computed $29 for 2021 amortization on the Depreciation Deduction Amount screen.  However, on that screen it also indicated that "In addition to the $29, you still have an additional $7,386 of refinance fees from your prior loan.  Enter this amount as other expense for this rental."  My two choices are to 1) "Transfer these fees for me to Other Expenses" or 2) "I'll enter these fees on my own later/I refinanced with the same lender."

I selected the first option, thinking that TurboTax would incorporate the 34.17% Business % into its calculation and therefore transfer only $2,434 to Other Expenses.  However, it transferred the entire $7,386 instead.

I would like to know whether 1) this is an error in TurboTax; 2) TurboTax purposefully disregards the Business % and it is up to me to edit the figure to $2,434 (which I tested and the edit is accepted); 3) I should have selected the second option to enter the $2,434 myself; or 4) I am able to deduct the full $7,386 as Other Expenses due to the property being sold.  I had already indicated in TurboTax that the rental property qualified as my primary residence for 2 of the last 5 years; I don't know whether that had any relevance as far as TurboTax determining the figure to transfer to Other Expenses.

If I choose #2, is this considered an override in TurboTax?  And would this automatically cancel the TurboTax 100% accuracy guarantee?

[Critter-3 · Accepted solution]

1) this is an error in TurboTax;  Not an error per say  but a weakness ... you should have only entered the Bus % and called it 100% business use originally ... then all would be good.

2) TurboTax purposefully disregards the Business % and it is up to me to edit the figure to $2,434 (which I tested and the edit is accepted);  You need to take the asset out of service to stop the amortization ... convert to personal  use so the rest is not taken automatically.

3) I should have selected the second option to enter the $2,434 myself;  Use this option ... make the balance a Sch E line 18 entry.

or 4) I am able to deduct the full $7,386 as Other Expenses due to the property being sold.  Absolutely not as you already know ... only the business portion is deductible. 

[Carl]

Assuming you entered those costs as an amortized asset correctly on the 2019 tax return, here's how to do it on the 2021 tax return so the remaining fees are deducted in 2021, since you sold the property in 2021.

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the sale. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

[laquan]

Thank you Critter-3 for providing explanations for each of the 4 options.  I tried option 3, but TurboTax does not take me to a screen where I can enter my own amount.  Instead, it takes me back to the list of Property Assets, leaving me unsure as to how I can manually enter the $2,434.  Therefore, I went with option 2, in which TurboTax transferred $7,386 to line 19 "Other" in Sch. E rather than line 18 "Depreciation expense or depletion" as you mentioned.  I was then able to edit the $7,386 figure to $2,434.  Note that the asset type I originally chose in 2019 when setting up the asset was "L - Amortizable intangibles".  I also answered "Yes" to "Special Handling Required?" as I believe refinancing fees qualify as "This is an intangible asset not considered section 1245 property."  I believe this is why TurboTax populated the unamortized expense in line 19 rather than line 18.  Are you able to confirm that this handling is correct?  Also, the refi fees do not show up on Form 4797, which I think is correct because I believe refi fees are not subject to depreciation recapture.  Can you confirm that this is correct?