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

[sc07734]

I also confirm that Turbo Tax, at this time (April 2022) in Turbo Tax Premier, does not properly expense the remaining points from the old loan when refinancing with a new loan. Here are my steps.

I edited the mortgage points item in my Schedule E Assets section:

- marked them as Sold / Retired etc. In further questions:

- Do they require Special Handling? No.

- Date or retirement / sale: closing date of new refi loan. 

- Sale price: LEAVE BLANK!!! . Sale price portion used for business: $0.

--> Sale price must be blank. If I set it to 0 then Turbo Tax complains .. something about form 179 and that intangibles must have the sale price blank..

- Finally I go to Miscellaneous section in Expenses and add a new line item as "Deductable remaining old loan costs".

Note that Turbo Tax amortizes a small portion of the old loan in the Assets section as above and prorates to the months in the year before the month of refi loan. This has to be taken into the account when calculating the remaining portion of the loan to be expensed in Miscellaneous.

[absoloodle37]

This situation was corrected for me in TurboTax as of 17 April 2022.  You Do have to go in and edit the previous refinance entry to indicate that the 'asset' was sold and provide the date and answer "no" special handling question, etc.   The expense corresponding to the remaining balance that hadn't been depreciated was automatically generated as an entry in the miscellaneous expenses section for that property as "Unrealized Refinancing Fees..."  Furthermore, the amount for this miscellaneous expense is calculated in accordance with the note you made below about TurboTax still amortizing the prorated amount corresponding to the month of the year that the loan was refinanced in.  So it all checked out for me. 

It's as if they read your Comment and addressed each issue exactly as you described.  They still need to fix the fact that you have to manually go into the entry for the refinance in the Asset section and indicate that it was sold (even though TurboTax had already asked if this property had been refinanced this year). But at least I'm glad they do the math for you and create the entry in the Miscellaneous expenses section for you.

[Carl]

Here's two boilerplates. One for how to enter points/refi fees so they are amortized/deducted. The other is how to deal with the deduction of remaining points on a sale or refi, assuming they were entered correctly into the program from the start.

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 "2021 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

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING OR SELLING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

[absoloodle37]

Thanks Carl, great post.  I'll bookmark these instructions to reference for my refinances next year.  Cheers!

[sc07734]

Thank you both. It seems that my mistake was to say "No" to "Requires Special Handling?".

If Turbo Tax doesn't have an example about Refi points in the help section for the Special Handling question, it would be great if they add it in for the sake of new users. If they have it and I missed, then it's my mistake once again.

[absoloodle37]

That's right, answering "Yes" to special handling apparently sets it up the correct way.  Really don't know why TurboTax doesn't improve the user experience for Premier users.  If they just pulled five people off the call center and had them run through a couple rental property/private business/crypto scenarios instead of answering calls, the feedback would improve the program immensely.  Many of these issues are super obvious and should be easy fix once they receive the feedback from their 'testers'.

[pnored]

@Carl  In 2022 Desktop Premier their is an entire section of question after you enter your expenses. It ask if you refinanced and it takes care of the new loan for you totally automatic. However, I'm still having issue with the second step of dealing with your old points (new lender).  At the end of entering your new loan fees/points it ask you if you have old points.  Then it kind of just drops you at this point. But help has the copy/pasted info below on that screen.  But nothing is automatic when you get to this point. I think I have gotten it figured out.  I did read on another thread where when you edit the old points enter $0 for the amount that were sold for when disposed of. This does accomplish deducting the remaining points that have not been deducted but doesn't seem right to me. It think I will try to follow the below instructions. 

Parrish 

Refinance Fees from Prior Refinances

Charges paid by a borrower to get a mortgage refinance for a rental must be amortized over the life of the loan. In the year you refinance to a new loan (and retire the prior loan), any existing refinance fees from any prior refinances become an expense and need to be entered in as an "Other Expense" item. If the mortgage is financed with the same lender, the unamortized fees on the first loan must be deducted over the term of the new loan.

How Do I Do This in TurboTax?

Points are entered in the same area of interview where you track the depreciation of your rental property, or rental furnishings. Go to the Asset/Depreciation topic and indicate your prior loan fees are no longer in service. As you go through this area of interview you will be given the remaining fees that have not been expensed or amortized. These additional expenses need to be entered as an "Other Expense" item. TurboTax will help guide you along the way. Completing this is a three-step process:

1) Enter your new refinancing information as an amortizable intangible
2) Navigate to the Depreciation Section in Rentals and indicate you have retired ("disposed" of) the old refinance fees
3) Calculate the unused portion of the old refinance fees and enter them as an "Other Expense"

[pnored]

@Carl In 2022 Premier desktop after you click yes to the special handling it does not do anything but say what your deduction for that year is (yes, I put in the date of my new loan)  The attached capture is  what it gives you after you say yes to special handling. And it does not enter the unrealized amount into other expenses.  Obviously this part of Turbotax needs some help!

Parrish

[Carl]

In 2022 Premier desktop after you click yes to the special handling it does not do anything but say what your deduction for that year is

It also states the numbers will be transferred to the correct forms for you. If you'll look in the expenses section for that property and take a peek in the Miscellaneous Expenses section, you'll see an entry there for $78.

[pnored]

 Hi @Carl Thanks for you response.  Actually $78 is the calculation for the year and it does transfer that to the appropriate section. But it does nothing with the unrealized gains as you suggested.  And I did answer that the asset was sold on the date the new Re-fi closed.  I manually went to Other Expenses for the property and added the unrealized gains.  This was my experience with Premier Desktop 2022 

- On the "Special Handling Required?" screen, click YES.  (Only gives me that years deduction even after I entered that I sold the asset and then does not address unrealized gains)

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

[AmyC]

Earlier in the thread, this was posted:

TurboTax will help guide you along the way. Completing this is a three-step process:

1) Enter your new refinancing information as an amortizable intangible

2) Navigate to the Depreciation Section in Rentals and indicate you have retired ("disposed" of) the old refinance fees

3) Calculate the unused portion of the old refinance fees and enter them as an "Other Expense"

So, step 3 requires you to do the math and the entry into Other Expenses. The program doesn't know if you refinanced with the same lender or not - so you have to do the work. It sounds like that is what you did and is the correct method. Good job!

@pnored 

[Carl]

@AmyC

So, step 3 requires you to do the math and the entry into Other Expenses.

I can't vouch for the online version. But with the desktop version the program will do that math "for you" and transfer the remaining fees to the Miscellaneous Expenses section in the program. It then gets transfered to/included with the amount on line 19 of the SCH E and labeled as "unrealized financing fees". Here's the procedure. Can you confirm weather or not it works the same for the online version? They should work, assuming the fees were correctly entered as an amortized asset to begin with.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING OR SELLING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."

[pnored]

@Carl  & @AmyC 

I am doing my taxes as I type this in Premier Desktop 2022 and it does not automatically transfer the unrealized gains for you. I answered everything & did  just as Carl nicely spelled out for us and it does not do that.  You have to enter them manually. There is a hyperlink with the information as AmyC suggest that shows you how to do it.   After you answer yes, to the Special Handling questions it take you to the screen I have attached and it is done! The $78 is this years deduction for the closing cost.  I then went manually to enter the rest of the unrealized gains. And I did answer yes to the refinance questions and entered the date the new loan started.   

[pnored]

@AmyC  Thanks for your reply!

[Carl]

The $78 is this years deduction for the closing cost.

What you are calling closing costs, in some cases are only a part of that amortized expenses. Those amortized expenses were identified by you when you originally entered them in the year you purchased the property (or refinanced the property) as "SEC 163: Loan Fees". The program can only deal with what you initially entered in the Other Asset Type section that you originally identified to the program as "SEC 163: Loan Fees". That includes all loan acquisition costs such as pre-paid interest, which is sometimes referred to as "points".

Sometimes, points will only include pre-paid interest. But it can include other things too. It just depends on how the bank reported it to you on the closing statement, and how you entered that data when you originally entered the amortized asset.

Basically, as it sits now with what you've done, you're fine.