Refinanced my duplex 2 years ago and twice in 2020, how do I 'complete' the depreciated points, etc. ?

[psyadam]

I refinanced my duplex 2 years ago, I live in one unit and rent out the other. And in that year, Turbotax had me depreciate the points and closing costs. In 2020, I refinanced that same property twice.

Not sure how to 'close out' or complete the original depreciated points, open and close the first 2020 refinance and then open deductions for the most recent refi?

Turbotax Home & Business seems to consider the depreciation as an 'Asset' but don't see a category to complete it, other than 'taken out of service for any other reason' so not quite sure how to enter this. Assuming I deduct the remaining original points/closing costs from original refi, as well as the initial 2020 refi which opened and closed within 6 months.

Help!

Thanks,

Adam

[MarilynG1]

You correctly added your first Refi costs as an Asset for your Rental Property.  You would do the same for each of your two 2020 refinances.

You don't have to close out the original Asset for the first refi.  You will now have three Refi Assets, each with different dates and amounts, that are depreciating along with the property itself.  

TurboTax calculates the depreciation on all your Rental Assets for you, so don't add Depreciation as an Asset. The Assets are Refi1, Refi2, Refi3 (for example).  

These won't be closed out until you Sell the Property, or Convert it to Personal Use. 

Remember to only report 50% of the Refi costs under your Rental, since you live in the other half of the duplex.

Click this link for more info Refinancing Rental Property. 

[psyadam]

My understanding (not sure I have a basis for it) is that when I refi a refi (which entails closing out the original refi to a zero balance with that lender), that I don't continue to depreciate those costs, simply take them all in that year.

From your response, that would seem to be inaccurate. Is that so? Or do I simply let Turbotax ask me the questions and follow from there?

To clarify, these are complete refi's, not additional mortgages.

Thanks,

Adam

[DianeW777]

Yes, if the refinance is not with the same lender (see below from IRS Publication 527).

• Loan or mortgage ends. If your loan or mortgage ends, you may be able to deduct any remaining points in the tax year in which the loan or mortgage ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. However, if the refinancing is with the same lender, the remaining points generally aren’t deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan.

If this is a completely new lender follow the steps below to expense the remaining balance.

When you are signed into your TurboTax account, go to the 'points' assets to select that they were removed or taken out of service on the date of the new refinanced mortgage.

Next select 'Miscellaneous expenses' as rental expense > Continue > Start beside Miscellaneous expenses enter the description 'Points due to refinance' then enter the remaining amount after depreciation that has already expensed.

NOTE: Be sure to check the amount of depreciation being used for 2020 based on the date taken out of service.

This will add the remaining points as an expense on your rental activity.  As noted be sure you only use 50% of the expense for the rental portion of your duplex.

[psyadam]

Thank you. I wanted to clarify that since half the property is rental, I am also writing off/depreciating closing costs in addition to the points. Would I still do that under 'misc' due to refinance?

Adam

[DawnC]

Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes.

Many other settlement fees and closing costs for buying/refinancing the property become additions to your basis in the property and part of your depreciation deduction, including:

• Abstract fees
• Charges for installing utility services
• Legal fees
• Recording fees
• Surveys
• Transfer taxes
• Title insurance
• Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, sales commissions and charges for improvements or repairs).

[psyadam]

Appreciate your response. However, now not sure if I should be adding the two refi's for 2020 each as a separate depreciation (including all the closing costs for the refi, as half rental property) or add to basis of home (not sure how to do that in turbotax).

Also, the first refi in February 2020 is also closed out in 2020 due to the second refi in September 2020. So close them out or continue to amortize over life of loan (although appears from earlier answer to close them out, but not sure how to figure amount as not sure if turbotax will do the 2020 depreciation separately so should subtract that from final number)?

Better for me to call and speak to a turbotax person on this?

[Carl]

Let's see if we can cut through the chase and deal with this directly. I will only be covering the steps to deal with the original loan, and the first refi in 2020. Assuming you correctly entered the points/refi fees for the 2nd refi, we don't need to do anything with the 2nd refi (unless you need help entering them correctly, but you probably don't)

I am also assuming that the first refi was "NOT" with the original lender.

- In the Assets/Depreciation section elect to start/update the refi asset for the original loan.

- Work it thorough and on the screen 'Did you stop using this asset in 2020?" click YES.

 - For the date of disposition, enter the closing date of the "FIRST" refi. Then continue.

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

 - Select the option to have the remaining fees to be deducted/transferred to rental expenses, then continue. The program will transfer the remaining amount to be deducted to the rental expense section as a Miscellaneous Expense.

Now do the same for the 1st ref, using the closing date of the 2nd refi as your disposition date.

[psyadam]

I appreciate your level of detail. This worked perfectly for me to close out my 2018 refi. I opened up my Feb 2020 refi but since it opened and closed in same year (2020), I clicked the 'I purchased asset new' and the other box 'the item was sold, retired, ..." box.

When I clicked 'yes' to special handling, it went immediately to the complete screen (unlike the 2018 refi that I closed out) and never allowed option to have remaining fees deducted/transferred to rental expenses as misc. And didn't fully debit the expenses.

Bug in system or ...?

Appreciate your feedback as I also entered the Sept 2020 refi and that was fine (but opened and stayed open)

Thanks, 

Adam

[psyadam]

Also, and not sure if relevant, gave me the 'you must amortize intangibles, not depreciate them' message.

[Carl]

When I clicked 'yes' to special handling, it went immediately to the complete screen (unlike the 2018 refi that I closed out) and never allowed option to have remaining fees deducted/transferred to rental expenses as misc.

Here's how to enter your 2020 refi fees (for both loans obtained in 2020) so that you can property "expense" the remaining fees from the 1st refi of 2020. Now you could probably just enter those refi fees of the first 2020 refi in the Misc Expenses section. But I think it would be safer to "show the flow" from the assets/depreciation section of the program.

- On the assets/depreciation list first delete the currently entered refi fees for both loans that you establishded in 2020. (Get your details for each refi entry first!)

click the "Add an Asset" button.

- Select Intangibles/Other Property, then continue.

- Select Amortizable Intangibles, then continue.

- Describe the asset (Refi-1 maybe), enter the amount, then the closing date of that loan. Then continue.

- Select Purchased new, then select "this item was sold, retired, etc. etc. etc." For the date you sold/retired it, enter the closing date of the "newer" refi, or the day before.

- Select "used 100% for business" Then enter the closing date of "this" refi. Then continue.

- For code section, select 163:Loan Fees, then continue.

- For useful life in years, enter the contracted life of "this" loan, then continue (commonly 30 years or 15 years)

- For "Special Handling Required?" click YES.

At this point, I am expecting you will be returned to the "Your Property Assets" screen. If you are not, then skip down to the "******************" line below.

- If you are returned to the property assets screen, take note of the amount for those refi fees that show as a deduction here.

 - You will need to manually enter the remaining fees to be deducted, as a Miscellaneous Expense in the Rental Expenses section. Make sure the remaining expenses were not"magically" entered already by the program, without letting you know this, and that you label the expense the same way you labeled them in the assets/depreciation section. I don't know if labeling them different would have the potential to "raise flags" or not.

********************

- Select the option to "Transfer the fees for me", then continue.

That "should* do it. You "might" see a bit of amortization on those fees on the "Your Property Assets" screen. If you do, then that's fine. But check the rental expenses section and you should see the remaining fees deducted as a Miscellaneous Expense.

[psyadam]

Thank you so much for explaining. Not sure why the original 2018 refi automatically entered the remaining amortization in 'misc' and the 2020 February refi didn't yet I manually added it.

Question: adding the remaining amortization lowered my Federal Taxes, yet it also lowered my California refund to zero, so it RAISED my California Taxes. Wouldn't this lower them as well? Or is there something I must manually adjust in the State Taxes as well?

[Carl]

Not sure why the original 2018 refi automatically entered the remaining amortization in 'misc' and the 2020 February refi didn't yet I manually added it.

That's right. You should have two entires for financing fees in MISC. (Or one entry that is the total of both maybe?)

Whatever remains of your financing fees to be amortized/deducted in the tax year you refinance the loan, is fully deductible in the tax year you refinance that loan.

- The remaining fees to be deducted of both the 2018 refi, and the *first* 2020 refi are fully deductible on your 2020 tax return.

As fpr state taxes (especially CA) I can't speak for those, since my state doesn't tax personal income and I've never even filed a state return for any state. If I were to make a wild guess, thing's will probably "straighten out" on the state return, once you have actually completed the state return. You don't even start the state return, until you've completed the Fed return.

A lot of data from the Fed return is automatically carried over to the state. So while you're in the process of completing the federal return, what that number for your state return says, is absolutely worthless and meaningless to you.

[psyadam]

Appreciate the response, yet ultimately, the California Tax went up over $200 when 'closing out' the first 2020 refi, which makes no sense to me. Anybody else, who has a State income tax with thoughts?