How to write off old closing costs after a refi for rental property?

[zmminvest]

I have a rental property and was amortizing the closing costs from the original home purchase.  Now I have refinanced the property and I am going to amortize the new closing costs associated with the refi.  However, how do I take the expense in Turbo Tax for original house purchase closing costs associated with the old loan?

[PattiF]

To remove and list prior amortization as an expense. 

Go to Your Property Assets page- Along with your rental, you should see your original refinancing fees and the depreciation amount.

• Select Edit. Continue through page descriptions of prior fees. Check box, the item was sold, retired or disposed of and the date of your new fees as the date sold.
• Continue to Confirm your Prior Amortization page.
• Select Yes on the Special Handling Required page, because the last option is true.
• Continue to next page and select radio button Transfer these fees for me to Other Expenses. View Sch. E (page 1) in forms mode to verify remaining depreciation and transfer to Other Expenses.

End result: Current depreciation amount for old loan. Remaining unamortized balance to be transferred to other expense line. Your old fees may still show on the asset page if you still have some depreciation for the current year, but it will not be listed there in the next year

 Add your  New Loan Fees as a new asset. On the Your Property Assets page, click Add an Asset link to enter data for new loan fees.

[Carl]

How your previously amortizing closing costs are treated, depends on the source of the refi loan.

If you refi'd through the same lender, then whatever you have left to amortize on the old loan, gets added to the amortized costs of the new loan and that new total is amortized over the life of the loan. (Or is it 15 years? I'm honestly not sure on the time frame.)

If you refi-d through a new lender, then the remaining costs to be amortized on the old loan are fully deductible in the year of the refi.

[zmminvest]

Pattif12:

So I am using TurboTax Business 2020 since I am filing for an LLC.  I don't see the same screen and options you describe. 

What I have done is went to the Federal Taxes>Rental Real Estate>clicked edit on the property in question>clicked "Update" on the "Dispose of Rental Real Estate Property" section at the bottom.  Clicked "Edit" on the asset to dispose of.   Now it gave me choices of (1) sold (2) given away or (3) abandoned.  I chose abandoned...I mean I would have preferred a "retired" option but without that option I thought abandoned was the better choice of the three options.  It asks for the date of abandonment and then proceeds to calculate a partial year's amort.  Which is fine.  But what it doesn't do is take the remaining asset value to other expense on my income statement so I manually did that through the "General Expense" section and entered a line for the write off of the closing costs.

Does this sound OK?

[zmminvest]

Carl:

So I did two refis.  One with same lender, and one with new lender.

For the one with the same lender I'm not sure how to "move" the remaining asset value of the old closing costs to the new one without messing with the old asset , which turbo tax doesn't seem to want me to do.  So I guess I will just lave the old closing costs amortizing on its original schedule..  It's only < 2 years difference.

Do you know where in the IRS code does it state you have to carry the original closing costs if you refi with the same lender for a rental property?

Thanks!

[Carl]

See IRS Publication 936 at https://www.irs.gov/pub/irs-pdf/p936.pdf

Page 8 first column

Mortgage ending early.If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you re-finance the mortgage with the same lender, you can't deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

[DTian]

Could you want to share some IRS document about this item? I don't know how I should treat the title cost on my old loan's closing document. 

[zymxhjjtm197227]

Hi Carl, I've refinance my rental property with same lender on 2020, the old refinance fee didn't automatically add to my new loan. can I add it to my 2021 return manually? which category do I put the old fee? thanks

[Carl]

Hi Carl, I've refinance my rental property with same lender on 2020,

Then you can not deduct the remaining amortized fees on the old loan, on your 2020 taxes.

the old refinance fee didn't automatically add to my new loan.

They really don't need to. Assuming the asset transferred from the 2019 return to the 2020 return, you can just leave that asset "as is" and it will continue to be deducted over the life of the original, now paid off loan.

can I add it to my 2021 return manually?

If you elect, you can add them to your new financing fees on the new loan. But then you have to delete the amortization entry for those fees on the old loan from the assets/depreciation section.

which category do I put the old fee?

what remains of your old refinancing fees don't go in a "category" per-se in your specific case, since you refinanced with the same lender. There shoud already be an entry in the assets/depreciation section for those fees (as well as the fees on the new loan) and are specifically classified as financing fees so that they are deducted over the life of the loan, and not depreciated.  Remember, depreciated assets are recaptured and taxed as some point, where are amortized assets are deducted over time with that deduction being permanent and forever.

To specify, (which is something the IRS pubs do not do very well) tangible assets (such as the property itself) are depreciated over time. Whenever you sell the property and it's assets, that depreciation is recaptured and taxed in the year of sale.

Your intangible assets (which is what refinancing fees are) are amortized and deducted over time, as apposed to being depreciated over time. In the tax year you sell the property any remaining amortized costs are fully deductible in the year of sale. There's other situations where they're fully deductible too, such as if you refinance the property with a different lender.

Since you refinanced with the same lender, your remaining amortized costs on the old loan are not fully deductible in the year of refinance. You can either:

1) Add them to your refi costs of the new loan and that new total gets deducted over the life of that new loan, or;

2) Leave the original entry for those amortized costs on the old loan and they will continue to be deducted over the original lifespan of that old loan.

[zymxhjjtm197227]

thanks for the detail clarification, very helpful. I will leave it with my old loan, it would be easier for me. 

[robthomas1212]

Hello, I have the same question.  I do not see the special treatment option in TT Business 2021.  Please advise.

[DianeW777]

These fees are amortized over the life of the loan.  Although it doesn't seem logical, refinance fees and mortgage points are also entered in the Assets/Depreciation section. The IRS considers these amortizable intangibles and accounting rules dictate that those are to be depreciated instead of deducted as an expense.  The number of months to use if the number of months for the loan repayment.

[Carl]

The IRS considers these amortizable intangibles and accounting rules dictate that those are to be depreciated instead of deducted as an expense. 

Can you clarify that? An amortized intangible is "deducted" over time - not depreciated. At least for financing and other fees associated with acquisition of the loan on rental property. Then when you sell, any remaining fees not yet deducted are fully deductible in the year of the sale.

Or are we saying the same thing in different ways?

[robthomas1212]

I understand that the costs from my new mortgage are amortized over the life of the loan (similar to what I did previously in the old mortgage).  I assume the unamortized costs from the old one hit the P&L now; if so, how do I accurately show this in TT Business?

[DianeW777]

Perhaps. When a mortgage loan is refinanced and it is with a different lender, then any remaining points that have not been deducted under the first lender can be deducted in the year of refinance. You can add this expense under miscellaneous expenses and use a label similar to 'loan payoff deductible fees'.

If a mortgage loan is refinanced with the same lender, any remaining points must be added to the points on the new loan if applicable, then divided by the loan term to determine the monthly amount you can deduct.  If there is a full year of mortgage payments then it would be 12 months deduction as points. For the first year it would be the number of months remaining in the year beginning with the first month payments begin and ending in December of that year. 

@robthomas1212