I paid closing costs for a refinance of my rental property. How do I navigate to the correct location to enter the closing costs?

[l4y0ut]

Is there a way to navigate to the screen or have Turbotax walk me through questions?

[ToddL99]

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?

[Carl]

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

[Achievement Engineering]

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.

[PatriciaV]

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).

[Achievement Engineering]

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.

[Carl]

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?

[Achievement Engineering]

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.

[Carl]

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.

[Achievement Engineering]

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.

[Carl]

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.

[Achievement Engineering]

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. 

[Carl]

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.

[Achievement Engineering]

OK.  Thank you!

[Mac1287]

@Carl 

I had asked a similar question on another thread: 

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-how-do-i-calculate...

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?