Refinancing Rentals

[stellarun21]

All, 

I refinanced rental property A and took out a new loan @ 300K with bank ABC on 1/31/21.  After paying off original loan 100K associated with rental property A and refinancing cost 20K, net proceed to me is 180K, which was used as down payments for rental property B and C. I spent 60K on rental B and it was closed on 4/1/2021. The remaining 120K was used on rental C, which was closed on 8/1/2021. Rental B and C have their own mortgage.  

I understand that I should dispose loan cost associated with original loan because the original loan was with a different bank. Now I refinanced with a new bank, bank ABC. The total refinancing cost was about 20K. To keep it simple, assume 12K was loan cost and 8K was title related charges/stamp taxes. 

1. Do I allocate the loan cost 12K among the rental A, B and C since the procced was used on three rentals? If so, do I allocate 35.71% to  A, 21.42% to B, and 42.87% to C?  Also, rental B and C were purchased with loans and have loan cost to be amortized. 

Rental A                         100K         100K/280K=35.71%

Rental B                            60K          60K/280K= 21.42%

Rental C                          120K        120K/280K=42.87%

Refinancing Cost            20K

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 Total New Loan            300K

2. What about the 8K title related charges associated with refinancing. Then should it be part of basis? Do I allocate them to all three rentals or just rental A? Do I create a separate asset and depreciate over 27.5 years (rental A was purchased a few years ago, so building/land were already placed in service and depreciated ) OR just add to basis of existing asset? Also, do I allocate it between land and building?

3. 1098 mortgage interest statement from the bank ABC shows I paid interest 12K in 2021. 

I understand interest need to be traced to all three rental and 3,273.39 out of 12K interest in 2021 will not be deductible. Even though there is only one 1098 from bank ABC, should I enter three 1098 in the system with below allocated amounts so that it follow to corresponding rental units?  

Rental A:                                          35.71%*12,000=4,285.20

Rental B:      21.42%*12,000*9months/11months=2,103.05

Rental C:   42.87%*12,000 *5 months/11months=2,338.36

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                Total deductible interest on rental             8,726.61

Sorry for the long text.  Appreciate your time and help. 

[AmyC]

1. Yes, allocation is fine. You need to keep the paper trail until all houses sold plus 3 years.

2. Points when refinanced are a separate asset. The fees can be deducted over the life of the new mortgage and are considered intangible. This follows code section 163.  Follow these steps:

1. Return to your rental property
2. Edit/Update
3. Scroll down to Assets/Depreciation
4. Edit/Update
5. Do you want to go directly to your asset summary?
6. Yes, continue
7. Click the blue Add an Asset button
8. Select Intangibles, Other Property, continue
9. Tell us more, categorize as Amortizable intangible, continue
10. Enter description and expenses, continue
11. I purchased it new
12. Enter the date of the refinance, continue
13. Select a code section, 163, continue
14. Recovery period, enter the number of years of the new mortgage, continue
15. Continue, continue

3. The schedule E contains the amount of mortgage interest with no relation to source. Entering the 1098 split as you mention is the perfect solution to get the information into the program and correctly onto your return.

[stellarun21]

Thanks Amy. I appreciate your time and help!  Just one more follow up question. Are you saying none of refinancing cost ( excluding real estate taxes, interest, insurance)  is added to basis? ). Refinancing cost, such as loan origination fee, title recording fees , etc are amotizated over the life of new loan?

[Carl]

If it helps, here's details on deducting remaining points on old loan, and entering the points for the new loan.

Note that with the new loan you don't have any property acquisition costs on the property that secures the loan. Any property acquisition costs you have, will be on the loan used to purchase Prob A & B, not on the refi loan amounts used for down payment.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING

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...."

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

[DianeW777]

Yes, the costs to refinance a loan on rental property is amortized over the life of the loan as indicated by our awesome Tax Expert @AmyC and  Tax Champ @Carl.

Note: IRS Publication 527

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.

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.  

[Carl]

I'm fairly sure that somewhere in this thread it was stated the refi was with a different lender. I think it was worded in a way to say the "new loan with different lender" or something like that.

[stellarun21]

Thanks for all the responses. Yes, refinancing was with a different lender;  I will deduct unamortized loan cost of property A on 2021 return. 

• Refinancing cost 20K will be allocated 35.71% to  rental property A, 21.42% to rental property B, and 42.87% to rental property C and then amortzie over 30 years, life of new loan, right? See my % in my question #1 of my original post. 

[RobertB4444]

@stellarun21  Yes, that is correct.