What closing costs from the rental property I purchased can I deduct?

[naviator2003]

Okay, I do have form 8582 in my return. Going through it, it states that all losses were allowed for this year. Did not use for personal purposes.

After some more digging, and research, what I found was that these expenses must be amortized, and the best answer I could find for how long is over the life of the mortgage:

What can I deduct when refinancing rental property... (intuit.com)

Sorry, not trying to stir up a hornet's nest or anything. Just wanted to put out this info, and get your take on it.

When it came to TurboTax, turns out TT never inputted the information into my Schedule E data to depreciate it. I contacted TT, and spoke with one of the tax advisors, and we had to enter it as an additional asset to the property in question (classified as Intangible, Other Property/Amortizable Intangibles). I inputted the total value of the expenses under "Cost", "Date Purchased or Acquired" as the start date of the new loan. For Recovery Period, I put the life of the mortgage.

[Carl]

Expenses associated with acquisition of the property are added to the cost basis of that property and depreciated over time. An example of this would be the title transfer fees paid at the courthouse to remove the seller's name from the title, and put the buyer's name on it. In the case of refinancing a property you already own, these types of fees just flat out will not exist.

Expenses associated with acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan. Such expenses are entered as other asset type, amortizable intangibles and fall under rule 163:Loan Financing Fees. An example of this would be points, as well as survey fees you paid for a property survey if required by the lender as a condition of loan approval.

[CharlesRP]

Hi RichardK, thank you for your post. I have settlement costs from refinancing rental property. I understand that the mortgage broker fees, and the like must be amortized, meaning a new asset must be created. However, does that also mean that the costs that get added to cost basis must be depreciated by adding a new asset to depreciate?

[Carl]

Costs associated with acquisition of the property are added to the cost basis of the property. In the case of refinancing a rental property you already own, you have none of these costs.

Cost associated with acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan.

If you are still amortizing costs from the first loan:

- If the new loan is with the same lender, then leave them there in the Assets/Depreciation section. You must continue to amortize for what would be the remainder of that first loan.

- If the new loan is with a different lender, then work through that specific asset to show that you stopped using it in 2020. Then any remaining costs on the old loan to be deducted are fully deductible in the year of the refi. If you make the property selection (It's self-evident) those costs will be transferred to Miscellaneous Expenses in the rental expenses section.

here's how to enter the amortized costs on the new loan 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 "2020 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

[CharlesRP]

Hi CarlR, I cannot thank you enough for your detailed and prompt explanation in your response. After I posed the question, I found that Pub 551 (Rev. December 2018), under Real Property: Settlement Costs pg.3, explicitly states that refinance costs must be, "must be capitalized as costs of getting a loan and can be deducted over the period of the loan." Thanks again.

[Carl]

Thanks for that reference. Will come in handy I'm sure. The wording of that is rather skewed. It states "If these costs relate to business property, items (1) through (3) are deductible as business expenses. Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan"

In my opinion (and we all know what opinions are like.) it would provide better clarity if that part read, "...myst be amortized as costs of getting a loan and can be deducted over the period of the loan"

I say that because defining capitalized assets as those items that get depreciated, and amortized assets as those items that get deducted, significantly reduces the chance of misinterpretation or misunderstanding.

[tagteam]

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@Carl wrote:

I say that because defining capitalized assets as those items that get depreciated, and amortized assets as those items that get deducted, significantly reduces the chance of misinterpretation or misunderstanding.

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@Carl 

The cost of an item is either capitalized or expensed. Assets that are capitalized are either depreciated or amortized over their useful lives; depreciation and amortization are simply two different forms of cost recovery for capitalized assets.

[Carl]

Oh I'm not in disagreement with that. I would just like to see the IRS clarify things a bit more by defining capitalized costs as those costs that are depreciated, since depreciation is commonly recaptured at some time. Then define amortized costs as those that are deducted, thus more clearly implying that a recapture of amortized costs does not occur. (But under the oxymoronic rule set I'm sure the IRS would have an exception for that.)

[tagteam]

Both depreciated costs and amortized costs are "capitalized" and deducted over time; if they were not they would be considered to be expensed and deducted immediately.

Recapture is an entirely separate issue.