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.
* Those costs that are basis adjustments can be part of your yearly depreciation deduction for the rental property.
For additional information, refer to Publication 527, Residential Rental Property, Publication 17, Your Individual Income Tax Guide, and Publication 535, Business Expenses. Several closing costs cannot be deducted and are not added to basis. Please see Publication 527 page 12 for more information.
The following items are some settlement fees and closing costs you cannot include in the basis of the property.
1. Casualty insurance premiums.
2. Rent for occupancy of the property before closing.
3. Charges for utilities or other services related to occupancy of the property before closing
4.Charges connected with getting a loan. The following are examples of these charges.
Points (discount points, loan origination fees).
Mortgage insurance premiums.
Loan assumption fees
Cost of a credit report.
Fees for an appraisal required by a lender.
5.Fees for refinancing a mortgage.
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.
Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
See TurboTax article.
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.
* Those costs that are basis adjustments can be part of your yearly depreciation deduction for the rental property.
For additional information, refer to Publication 527, Residential Rental Property, Publication 17, Your Individual Income Tax Guide, and Publication 535, Business Expenses. Several closing costs cannot be deducted and are not added to basis. Please see Publication 527 page 12 for more information.
The following items are some settlement fees and closing costs you cannot include in the basis of the property.
1. Casualty insurance premiums.
2. Rent for occupancy of the property before closing.
3. Charges for utilities or other services related to occupancy of the property before closing
4.Charges connected with getting a loan. The following are examples of these charges.
Points (discount points, loan origination fees).
Mortgage insurance premiums.
Loan assumption fees
Cost of a credit report.
Fees for an appraisal required by a lender.
5.Fees for refinancing a mortgage.
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.
Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
See TurboTax article.
what do i do if i failed to add the additional closing cost allowances to the cost basis in prior tax returns? should i add those to the cost basis this year or not?
I am not sure how you handled the original closing costs. But you should go back and amend up to 3 years of returns and report it correctly. If you elect not to do so at the very least you should adjust the basis of the property and report the depreciation correctly going forward. If you are ever audited the IRS will calculate the deprecation correctly because the rule is Allowed or Allowable.
what do i do if i failed to add the additional closing cost allowances to the cost basis in prior tax returns?
What do you mean "return**S**? You state that in the plural. Your closing costs can only be claimed on one tax return, and only in the tax year you actually paid them. If you use the program the way it is designed and intended to be used, it will ask you for specific closing costs and the program will handle them accordingly.
Basically, any costs associated with the acquisition of the mortgage are deductible. For example, origination fees. Whereas any cost associated with acquisition of the property are added to the cost basis of the property. For example, title transfer fees.
How would this work if you purchased a duplex and live in one and rent the other?
Would all loan costs get added to the total cost basis of the home and cost basis split between both units?
Would I deduct the points paid on the part I live in on my personal tax return or would they only be deducted when it was converted to a 100% rental property?
If you bought a duplex for 300,000 and had costs that could be added to the basis of $2,000, then the adjusted basis would be $302,000 for the property.
Assuming equal sq ft, $151,000 would be the basis of the rental property and $151,000 would be the basis of the personal home.
If you had $1,000 in deductible expenses, $500 could be deducted on Schedule E against rental income and $500 could be deducted on Schedule A as an itemized deduction. These expenses would be deducted in the year that the expenses were incurred.
Thanks a lot for your help, great info. I just want to make sure I am doing it right. So for Title related fees, recording fees, origination charges, etc. I should list them as Property Assets, and choose "intangibles, other property", choose "amortizable intangibles", is that right?
Thanks a lot.
The following loan costs are generally deductible.
Hello, for refinancing a mortgage for a rental property, where do these expenses get recorded/what forms? Asking because I filed my returns, and I can't see anywhere in my returns where those expenses where recorded/taken into account (I did enter these values in Turbotax).
The expenses for mortgage interest and real estate or property taxes is under the Deductions and Credits section in TurboTax.
It's important to use the following TurboTax article to record the mortgage interest correctly, if you have two loans, one an original or previously refinanced loan and the new or first refinanced loan. In other words two Forms 1098 for mortgage interest.
Before you do anything, if you decide you need to amend your tax return, carefully review the information below before you begin.
Should have been more clear with question. I was specifically referring to the expenses occurred when you refinance a rental property. Things like Escrow Fees, Recording Fees, etc. I found a worksheet in my full return named "Rental Refinance Worksheet" where all of these expenses were listed/catalogued. My question is: how do this information/these values affect my return?
You can deduct the refinance closing costs on rental property as refinance expenses in the year of the refinance. They will reduce your rental income and as such may reduce your taxes in the year you report them on your tax return.
@ThomasM125 Thanks for the reply. If that is the case, it is not showing correctly for my 2020 return. My rental income was not reduced at all, for the one property I refinanced, nor for all of my properties.
It may be that your net rental income is showing as a loss, and as such it may not be deductible in the current year. This can happen when your income is over $150,000, which will result in your rental losses being suspended.
Also, if you used the rental property for personal purposes that can affect the deductible loss allowed.
If you have form 8582 in your return, you have passive losses that may limit the deduction of losses on your rental schedule E.
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.
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.
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?
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
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.
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.
@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.
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.
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.)