There is no single location to enter "closing costs" for a refinance of a rental property - where they are entered depends on what the closing costs are.
Some costs listed on a closing statement ("closing costs") may be deductible in the current year (e.g. prepaid interest and real estate taxes), some must be capitalized and amortized over time (e.g. points) and others added to the cost basis of the property (e.g. like title search fees or recording fees) and depreciated.
These "costs" are entered in their appropriate sections of the Rental Properties and Royalties interview of TurboTax Self-Employed (or desktop Home & Business).
See What can I deduct when refinancing rental property?
Expenses related to acquisition of the property are added to the cost basis of the property. An example would be the title fees paid at the courthouse to remove the seller's name from the deed and replace it with the buyer's name. Since this is a refinance, you don't have any of these expenses.
Expenses related to acquisition of the loan are amortized and deducted over the life of the loan. An example of this would include origination fees or points paid on the loan. Would also include the cost of a property survey if the lender required it as a condition of approving the loan. Expenses for this are entered in the assets/depreciation section as an amortized (not capitalized) expense and deducted (not depreciated) over the life of the loan. Typically, that would be a 15 year or 30 year loan.
ENTERING POINTS
here's how to enter the points in the Assets/Depreciation section.. (does not apply to entering the property itself, or any other property assets.)
- Select the Add and Asset button. (go straight to the asset summary if presented that option)
- Select Intangibles/Other Property, then continue.
- Select Amortizable Intangibles, then continue.
- Describe it as something like "2020 Financing Fees". Then enter the amount, and the closing date of the loan. Then continue.
- Select "purchased new", then "100% business use", enter the closing date of the loan (again), then continue.
- Code section is 163:Loan Fees, then continue.
- Useful LIfe in Years is the length of the loan, then continue.
- You can "show details" if you like. Then continue, and that does it
This is about the refinance of a commercial rental property. I know how to enter the loan fees (such as loan origination fees, appraisal fees) to be amortized over the the life of the loan. But I am confused still about how to add the closing costs (such as recording fees, escrow fees, ALTA loan policy fees - fees that we pay to the title company), to the cost basis of the property. Since this is a refinance, there is already a cost basis history from the first year the property was acquired. Meanwhile, that basis is being depreciated, how do I add to that basis? The refinance is with a different lender. Do I expense any remaining closing costs from the original lender, and then add the new closing costs to the basis and start depreciating, how many years? I don't see where Turbo Tax is asking me these questions. I am using TurboTax Business for Partnerships, Corporations, LLCs. Please help.
Yes, the closing costs for a refinance are added to the cost basis for the property. You may report this total as another asset for amortization under Rental Real Estate Assets. Choose Rental Real Estate for the type of asset, then "Amortizable Intangible" on the page titled "Tell Us a Little More." (Mortgage refinance costs are listed in the examples for this type of asset.) The Code section is 163: Loan fees, refinance costs. The amortization period would be the term of the loan (default is 15 years).
Thanks. Your response is for the amount associated with getting the loan (such as points, loan origination fees), which is amortized over the life of the loan. My question is for the amount associated with the property. Even though it is a refinance, there are charges paid to the title company, such as recording fees, ALTA loan policy fees, etc.. that should be added to the basis of the cost, and not amortized. And that it is not clear how I should do. And I don't see any interviews on Turbo Tax to help with that.
My question is for the amount associated with the property
If this is a refi, then you don't have anything associated with acquisition of the property. Not a penny. You already own the property, and therefore acquired it before any refi was done. It's all associated with acquisition of the loan.
But maybe you changed something about the ownership? Such as adding or removing an owner?
Thanks for your response. Maybe it is not exactly a re-finance, It is refinancing with a cashout - pay back the old loan and take out a new loan with a cashout. Besides the loan fees, it has Title Charges such as: ALTA loan Policy, CLTA Environmental Protection Lien, CLTA Designation of Improvements, CLTA Restrictins, Encroachments and Minerals Loan Policy, Recording Fees, and a small Title Fee, all paid to the title company. How should these be treated and entered into TurboTax? I don't see any questions pertaining to these in the interview.
Maybe it is not exactly a re-finance, It is refinancing with a cashout - pay back the old loan and take out a new loan with a cashout.
It's still a refi. Do take note that for whatever percentage of the refi was not used to pay off the old loan, you can only deduct an equal percentage of the mortgage interest. For example, if you owed $40K on the old loan, refi'd for $50K, then only 80% of the refi was used to pay off the old loan. Therefore, only 80% of the mortgage interest on the refi is deductible.
You can claim more than 80% equal to the percentage of the proceeds used to buy, build or improve the property you refi'd though.
Besides the loan fees, it has Title Charges such as: ALTA loan Policy, CLTA Environmental Protection Lien, CLTA Designation of Improvements, CLTA Restrictins, Encroachments and Minerals Loan Policy, Recording Fees, and a small Title Fee, all paid to the title company.
They can call those fees whatever they want actually. But the fact is, ownership of the property did not change in any way, shape, form or fashion, nor did you "acquire" anything in addition to the property you owned before the refi. So they're all loan acquisition fees.
Maybe it is not exactly a re-finance, It is refinancing with a cashout - pay back the old loan and take out a new loan with a cashout.
It's still a refi. Do take note that for whatever percentage of the refi was not used to pay off the old loan, you can only deduct an equal percentage of the mortgage interest. For example, if you owed $40K on the old loan, refi'd for $50K, then only 80% of the refi was used to pay off the old loan. Therefore, only 80% of the mortgage interest on the refi is deductible.
You can claim more than 80% equal to the percentage of the proceeds used to buy, build or improve the property you refi'd though.
Thank you! I did not know that. But this gets complicated, to determine year after year what qualifies as 'improving the property', since the new loan is for a long 20 or some years. But I understand what you are saying.
Besides the loan fees, it has Title Charges such as: ALTA loan Policy, CLTA Environmental Protection Lien, CLTA Designation of Improvements, CLTA Restrictins, Encroachments and Minerals Loan Policy, Recording Fees, and a small Title Fee, all paid to the title company.
They can call those fees whatever they want actually. But the fact is, ownership of the property did not change in any way, shape, form or fashion, nor did you "acquire" anything in addition to the property you owned before the refi. So they're all loan acquisition fees.
Yes, I was thinking the same. It makes sense. Thanks for clarifying and confirming. You really cleared this up for me. Thanks again! I really appreciate it.
But this gets complicated, to determine year after year what qualifies as 'improving the property', since the new loan is for a long 20 or some years. But I understand what you are saying.
Be aware that percentage remains the same each year, for the life of the loan. But also be aware that it "can" change too. As an example, use my numbers above. With those numbers, only 80% of the interest on the new loan are deductible every year, for the life of the loan.
But let's say 2 years from now in 2024 I install a new Central Air unit in the property at a cost of $5000. Provided I've got the documentation to prove it (the tracing rules to show I used "that" cash out money for this) then that means I can, starting in 2024, claim 90% of my mortgage interest on the loan.
But this gets complicated, to determine year after year what qualifies as 'improving the property', since the new loan is for a long 20 or some years. But I understand what you are saying.
Be aware that percentage remains the same each year, for the life of the loan. But also be aware that it "can" change too. As an example, use my numbers above. With those numbers, only 80% of the interest on the new loan are deductible every year, for the life of the loan.
But let's say 2 years from now in 2024 I install a new Central Air unit in the property at a cost of $5000. Provided I've got the documentation to prove it (the tracing rules to show I used "that" cash out money for this) then that means I can, starting in 2024, claim 90% of my mortgage interest on the loan.
Now I am not sure about this. Does this apply to rental property only? We did cash out refinance on our own residential property and our CPA deducted the mortgage interest based on the bank's 1098.
IRS Publication 936 at https://www.irs.gov/pub/irs-pdf/p936.pdf starting on page 9 with "Part II - Limits on Home Mortgage Interest Deduction" covers all the fine details, exceptions, and the what-not. It covers a lot. So you'll have to read it through to determine what applies to your specific situation, and determine just how it applies.
I had asked a similar question on another thread:
However the responses I received there stated that the percentage of deductible mortgage interest varies year by year (and should be recalculated) as the total principal balance decreases over time. Can you point me to a specific section in Pub 936 where it is explicitly explained that the original percentages have to be carried through the life of the loan?
The explanation I've received is that as per Pub 535, which relates directly to the Business Expense, the total principal balance of the loan is repaid in the following order:
1. Personal use
2. Investments and passive activities (other than those included in 3)
3. Passive activities in connection with a rental real estate activity in which you actively participate
4. Former passive activities
5. Trade or business use and expenses for certain low-income housing projects
This is under Chapter 4 Interest -> Loan Repayment. If the percentage remains the same for the life of the loan, wouldn't they have specified that the loan is repaid at the same rate for the different allocations?
You have to figure the average balance of each mortgage to determine your qualified loan limit. You need these amounts to complete lines 1, 2, 7, and 12 of Table 1. You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. The following are methods you can use to figure your average mortgage balances. Link is to Pub 936
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The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds.
Allocate your interest expense to the following categories.
In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses. Pub 535
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You can choose to treat any debt secured by your qualified home as not secured by the home. This treatment begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the IRS.
You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Pub 936
Thank you for the detailed response @DawnC . I did read through this section before and is part of the basis why I believe the percentage of the deductible mortgage interest varies (specifically, it decreases over time as long as there are no further modifications to the existing mortgage and no new mortgages are introduced).
In particular, the section titled Mixed-Use Mortgages with the below excerpt, along with Example 1 seem to confirm this:
Figure the balance of that category of debt for each month. This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order.
First, any home equity debt not used to buy, build, or substantially improve the home.
Next, any grandfathered debt.
Finally, any home acquisition debt.
Example 1 suggests that the Home Acquisition Debt ($180,000) doesn't decrease over the course of the year, but the Total Debt ($200,000 -> $190,000) and Home Equity Debt ($20,000 -> $10,000) do. And to extrapolate from the example, the deductible mortgage interest at the start of the 2nd mortgage is at 90% (180,000/200,000) in March, while at the end of the year it is at 94.7% (180,000/190,000). And obviously the ultimate number used for the year would be the average.
However, I believe this contradicts what @Carl said in an earlier response:
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But this gets complicated, to determine year after year what qualifies as 'improving the property', since the new loan is for a long 20 or some years. But I understand what you are saying.
Be aware that percentage remains the same each year, for the life of the loan. But also be aware that it "can" change too. As an example, use my numbers above. With those numbers, only 80% of the interest on the new loan are deductible every year, for the life of the loan.
But let's say 2 years from now in 2024 I install a new Central Air unit in the property at a cost of $5000. Provided I've got the documentation to prove it (the tracing rules to show I used "that" cash out money for this) then that means I can, starting in 2024, claim 90% of my mortgage interest on the loan.
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I just want to clarify that the percentage of deductible mortgage interest varies over time and eventually increases to 100%, specifically with mixed-use mortgages (such as a cash-out refi), and that it is not calculated only once at the beginning and applied yearly until the loan is fully paid off.