Personal property converted to rental property - can I deduct fees associated with a refinance prior to conversion?

[nicholas-walker]

I bought a house in 2005 and took out the initial mortgage.  I refinanced the house in 2011 and paid fees associated with the refinance.  I converted the house to a rental in April 2015, refinancing it again right before the conversion.  Per the rental property section of TurboTax, I can deduct fees from the original purchase, and then the last refinance.  Can I also deduct fees from the 2011 refinance?  Have not been able to find anything about this so I am assuming no.  Or should I be using the 2011 refinance instead of the fees from the original 2005 mortgage.

[DianeW]

There are many fees associated with a refinanced loan similar to an original loan as you can see from TurboTax.

Points/loan origination fees on the first or original mortgage would have been deducted in the year of purchase.  The same fees on a refinance must be amortized over the life of the loan (assuming no additional money was borrowed to improve the home).  However, the first refinance was for personal use (2011).  If you have any remaining deduction that you were amortizing you would enter the balance on itemized deductions under mortgage interest assuming it's not the same lender. 

If it was the same lender then you must continue to amortize the amount over the life of the new loan, still under the personal use rules.

The second refinance is directly attributable to the rental conversion.  All fees would be listed here as shown in the attachment (click to enlarge and view).  Any fees that were not allow as a deduction on the original purchase such as recording fees or transfer tax should be added to the cost basis of the house for entry in the asset section.

[VDR]

I had a similar question but there is one more nuance.  I assume what you describe applies to origination points, which are amortizable for both, rental and personal property.  But what should one do with mortgage costs other than the points, from the earlier refinances?  All those application fee, underwriting, appraisal, recording, etc.  Unlike points, they are neither amortizable nor deductible for personal property.  Can one recover/amortize those prior mortgage costs after converting the property to rental?

In the case of original poster, he refinanced in 2011 and 2015, both times while the property was still in personal use.  Then he converted to rental.  He will be amortizing the origination points, but what about all those application, etc. fees?

[ColeenD3]

@VDR

Certain fees are able to be deducted upon the sale of the property amortizable. They are added to the basis and reduce your gain upon the sale.

The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include:

    * Abstract fees,

    * Charges for installing utility services,

    * Legal fees,

    * Recording fees,

    * Surveys,

    * Transfer taxes,

    * Title insurance, and

    * Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Please see this link for more information. Closing costs

[Carl]

Hopefully this is helpful for at least some participating in this thread.

Costs associated with acquisition of the property such as title transfer fees for example, are capitalized, meaning they get added to the cost basis of the property and depreciated over time.

Cost associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan.  So when you have a refi any amortized costs not fully deducted yet on the first loan are fully deducted in the year of the refi. Then your loan acquisition costs for the refi loan are amortized and deducted over the life of that loan.

So when you have a refi, there are no property acquisition cost associated with the refi loan. Therefore the cost basis of the property does not change and depreciation of the property continues on "as if" nothing happened. (because nothing did happen with the land or structure)

EDIT: 4/7/2019 to provide additional clarity

If your refi is with the same lender as the prior mortgage, then your amortized cost on that prior mortgage that have not yet been deducted, are added to your amortized cost of the new mortgage and the total is amortized/deducted over the life of the new loan.

If your refi is with a different lender, then any remaining costs left to be deducted on the old mortgage, are fully deducted in the year of the refi with the new lender. Then the "new" loan acquisition costs with that new lender are amortized and deducted over the life of the new refi mortgage.

[Anonymous]

I had the same question and you answered it precisely and succinctly. Thank you.

[AE73]

VDR’s question has not been answered. Can someone help. 

[AE73]

@VDR Had a specific question that Was not answered. I too am facing the same situation. Please help provide clarity.