Pre payment penalty on commercial loan for a rental property

[Qtax09]

I converted my home into a rental property. I took out a nonconforming commercial loan on it to buy another home in another state.

I have a 3 year prepayment penalty.  Is that penalty deductible if I sell the rental property  sooner?

[tagteam]

See https://www.irs.gov/publications/p936#en_US_2023_publink1000229919

[Qtax09]

Thank you.  But still do not understand how a rental property is treated with the loan prepay penalty.

[tagteam]

I'm going to page another member, @AmeliesUncle 

[tagteam · Accepted solution]

Why a prepayment penalty would be treated differently for rental real estate than for a home loan doesn't make much sense.

[AmeliesUncle]

Could you clarify your situation?

You said you took out another loan, but then you are asking about a prepayment penalty (which seems to be about PAYING a loan, rather than receiving a new loan).  Could you expand on that; taking out a loan and prepaying it seem to be opposites.

Is the other home in the other state a rental?  Personal?  Something else?

What EXACTLY is the prepayment penalty for?  You need to look at the EXACT verbiage in your contract.

[Qtax09]

I recently got a commercial (non conforming) loan on my rental property with a three year pre payment penalty.

If I sell the property before 3 years, will the penalty be deductable on my taxes?

[Qtax09]

Thank you.

I put a new mortgage on my home. It was a commercial loan with a prepayment penalty of 3 yrs.

I moved out immediately and converted it to a rental.

I then used the money to buy a home in another state where I live now.

I have decided to sell the rental property...and will incur a penalty for selling before the 3 years is up.

Can I deduct the penalty from my capital gains this year?

[AmeliesUncle]

No.  If the loan was used to purchase your personal residence, the loan does not affect any rental deductions or rental capital gain.