I performed a cash out refinance on a rental property. Can I depreciate the added value to the property as an asset (less the closing costs and the cash out amount)?

[dboddy]

The original purchase price was $180k. I refinanced a year later at $240k, pulling out $20k cash. The closing costs/fees were $3k. Can I depreciate the added value/cost of the property as an additional asset ($37k, which is $240k-180k-20k-3k)?

[TomYoung · Accepted solution]

Putting a larger mortgage on a property in no way adds to either the cost or the value of the property and in no way affects the basis in the property unless some amount of the additional amount borrowed is used to pay for an addition or improvement on the property.  If some amount of the proceeds was used to to pay for an addition or improvement then you use the amount actually paid for the addition or improvement as the increase in depreciable cost.

Tom Young

[dboddy]

Hi Tom, thanks for the answer, but I'm wondering if there is some confusion. I'm not talking about expensing/depreciating the proceeds from the refi, but the non-proceeds, increased amount I have now paid for the property. In other words, not including the cash out proceeds, I have paid an additional amount for the property. How do I expense that. For example, say I purchased a property for $100k, then refinanced at $110k and pulled out $5k cash. Can I depreciate the remaining $5k, which is now additional cost of the property, as a separate asset? Effectively, I have now paid $105k for that property.

[TomYoung]

When I was first trying to answer your question I tried to work with the numbers you presented, but I couldn't get them to make any sense unless you used some of the proceeds of the new loan to make additions or improvements to the property.  So I took the other approach and simply told you in a general fashion what would increase your basis in the property.

With you second example let's say, for sake of simplicity, that you originally bought the property for $100K, all cash.  The value of the property goes up enough that now you can get a $110K loan.  You "repay" yourself your original $100K and actually get an additional $5K to put in the bank in addition.  Presumably the "missing" $5K got consumed in refinancing costs.  You did't pay an additional $5K for the property, you paid an additional $5K to get that $110K loan.

[ivanmiloushev]

Can the property be transferred to a single-member LLC during the refinancing process and increase the cost basis that way? Would that require filing form 1065?