How to treat the costs of a mortgage refinance of a rental property when the mortgage is paid off without selling the property

[user322]

Can a knowledgeable person please clarify how to treat the costs of a mortgage refinance of a rental property when the mortgage is paid off without selling the property?  In 2012 I refinanced a rental property and started carrying an item on my depreciation form for the closing costs to depreciate over 27.5 years.  In 2020 the mortgage was paid off and I still own the property.  Can I now write off the remaining balance of the closing costs, which have not been depreciated, now that the loan is gone?  Thank you.

To add more detail to my question, I would say that I am carrying two items related to the 30 year refinance, on my tax depreciation form - one for the lender fees, appraisal report, etc... and one for the items that are normally added to the basis like title search fees or recording fees.  They have both been depreciating at the 27.5 years rate.  Can I now expense the undepreciated balance of one or both of these items as Other rental expense, now that the loan is paid off? Thank you.

[DavidD66]

Yes, you can deduct those capitalized loan costs you were amortizing as an expense in the year the loan was paid off.  The items that were added to your basis are still a part of your cost basis.  If the loan was paid off in a prior year, you will need to file an amended deduct the loan costs being amortized over the life of the loan.    

[user322]

Thank you for your reply.  I need to clarify further, for the sake of complete accuracy, that I already expensed the undepreciated “capitalized loan costs” in 2020 when I paid the loan off, so your answer confirms that this was correct – so now the issue is what to do the items that are normally added to the basis like title search fees or recording fees.  They are still showing on my depreciation form at the 27.5 years rate, even though the loan is paid off.  Do they need to remain there until the 27.5 years pass, or they can also be expensed as Other rental expense in 2022 because the loan is paid off (I did know what to do in 2020, so I had left them there)? Thank you.

[PatriciaV]

Closing costs, like title fees, recording fees, surveys, etc., are included in the basis of the underlying asset, even if the mortgage to purchase the property has been paid off. You would expense only those amortized items that relate directly to the mortgage (typically points). The other settlement costs remain on your return until the property is sold.

For more info, see IRS Pub 551 Settlement Costs.

[user322]

Thank you all for your help.