Closing cost deduction questions of a loan and a refinance for my vacation home rental

[wleuter]

I purchased my house in 2019 with a loan and later did a refinancing in 2021, then I rented my house in 2022 for the first time as a vacation home. (We only rented like half a year, then we moved back)

My question is how can I deduct the closing cost of my loan and my refinancing loan?

I read this from TurboTax Forum

 - Cost related to the acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan.

 - Cost related to acquisition of the property are added to the cost basis of the property. They get capitalized and depreciated over time.

My question about the closing cost deduction for the loan of purchasing my house

Since I rented my house as a vacation home, can I use the same rules above to do the deduction for the loan of purchasing my house?

My question about the closing cost deduction for the refinancing loan

For the refinancing loan, my understanding is that its cost does not add to the cost basis of the property

• Should I amortize the whole cost?
  OR
• Should I only amortize the cost related to the acquisition of the loan and ignore the cost related to acquisition of the property?
  OR
• My understanding is wrong

Thanks!

[tagteam]

See https://turbotax.intuit.com/tax-tips/home-ownership/mortgage-refinance-tax-deductions/L2fzA7hg5

Note that there are various costs and expenses that you may incur that are not deductible prior to placing your property in service as a rental.

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@wleuter wrote:

 - Cost related to the acquisition of the loan are amortized (not capitalized) and deducted (not depreciated) over the life of the loan.

 - Cost related to acquisition of the property are added to the cost basis of the property. They get capitalized and depreciated over time.

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That was written by someone who has an imperfect understanding of cost recovery for the purposes of federal income taxation. Adding costs to the basis of property is capitalizing those costs. Amortization generally is applicable to intangible assets while depreciation applies to tangible assets (otherwise the principle with respect to both is identical).

[wleuter]

@tagteam 

Thanks for your answer.

After reading the link you mentioned, I still have some questions.

Does it mean I can not amortize any cost from my loan (for purchasing my house) closing cost when calculating my tax deduction for my long term rental or my vacation home rental?

[tagteam]

You can still deduct points over the life of the loan, regardless. 

Other costs associated with the loan are not deductible nor can you add them to your basis.

[wleuter]

@tagteam 

Thanks for your answer.

What about the refinancing loan for my vacation home rental?

Can I amortize or depreciate any cost of it? (I did the refinancing before I put my house in service)

[tagteam · Accepted solution]

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@wleuter wrote:

Can I amortize or depreciate any cost of it? (I did the refinancing before I put my house in service)

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My understanding (correct me if I'm wrong), is that this is your principal residence, you're renting it part of the year, and you incurred the charges prior to renting it (placing it in service). As a result, you cannot deduct those expenses incurred prior to rental use.

[wleuter]

Yes, that is exactly my situation.

Thanks for your help!

[wleuter]

Hi @tagteam 

Just one more question about this answer for possible situation in the future.

What if the refinancing happened after I placed my vacation home in service, should I amortize / depreciate any closing costs?

Thanks! 

[tagteam]

Typical rental expenses are deductible after you place the property in service.

[wleuter]

Hi @tagteam 

I have one more question about this answer.

Other than my current vacation home rental (It is my primary residence), I have another rental property for long term rental which I also placed in service for the first time last year.

For the loan closing cost for that rental property, can I amortize the costs related to acquisition of the loan?

Thanks!

[tagteam]

Yes, you can amortize those costs.

[wleuter]

@tagteam 

For this answer I still want to have more discussion for some special cases

Case 1

* I placed my vacation home in service for the first time in 2020 and rented for 7 months

* I did a refinancing loan for the house in 2021 but did not rented the house at all in 2021

* I rented the house again for 5 months in 2022

Can I deduct any refinancing closing cost for this rental in my 2022 tax return?

Case 2

* I placed my vacation home in service for the first time in 2021 and rented for 7 months

* I did a refinancing loan for the house in the same year but after my rental is over

* I rented the house again for 5 months in 2022

Can I deduct any refinancing closing cost for this rental in my 2022 tax return?

Thank you very much!

[tagteam]

Now I'm a bit confused. Do you have two vacation homes or one vacation home or one vacation home and then another property that you rent on a long-term basis?

You can deduct your refinancing costs provided the property is in service for rental use. Otherwise, costs, except for points (that are amortized over the life of the loan), associated with the loan (such as appraisal and processing fees) are not deductible.

[wleuter]

@tagteam 

I have only vacation home. The cases are just for discussion.

When you say "You can deduct your refinancing costs provided the property is in service for rental use.",

for case 1, the year the refinancing happened had no rental, but the year before and after I rented my house, can I still deduct the refinancing closing cost for the year after refinancing.

for case 2, let's say I rented my house for the first 7 months and in the 8th month, I did the refinancing, can I deduct the refinancing closing cost the this year?

Thank you very much!

[tagteam]

I'm not sure if the information from the On Demand Guidance will help, but I figured I'd post it just in case (for your perusal). Also, note that points you pay for refinancing are deductible regardless (over the life of the loan).

Ultimately, you need to determine whether the property is in service (available for rental use). If it is not (or you have personal use at the time), then those costs are simply not deductible.

What about the interest I paid on a refinanced mortgage?

When you refinance your home, you can usually deduct the entire amount of interest you paid on the loan for the refinance.

However, with a refinance loan, you can't deduct the portion of interest you paid on the new loan balance that is more than your old mortgage balance unless the excess was used to buy, build or substantially improve a principal residence or second home.

You can also deduct interest you paid on the old loan before you refinanced.

What are points and are they deductible?

Points are fees you pay to get a loan. These fees are also called: loan origination fees, maximum loan charges, loan discount, or discount points.

Points don't include broker fees, funding fees, processing fees, settlement fees or underwriting fees.

In general, points are deductible for loans you got to pay for your home in the year in which you pay them. Points paid on a loan you got to refinance your home are usually deducted over the life of the loan.

What if I have a second home?

A second home is a residence you own in addition to your primary home. You live in your primary home, but may use the second home as a vacation residence.

- If you rent out your second home for part of the year, make sure it qualifies as a "second home" for purposes of the home loan interest deduction. In order to deduct the home loan interest, you need to live in the home for 15 days or more, or use the home for more than 10% of the days that the home is rented, whichever is longer. If you use the home less than this during the year, it is not considered to be your second home.

- If you have more than one "second" home (this means you have a primary home plus two or more additional homes), only one of the additional homes can qualify as a "second" home for this deduction. You can change which home you claim as your "second" home from year to year, depending on which provides the greatest deduction.

- If you buy another "second" home during the year (for example, you have a primary home and one or more additional homes) you can treat the new home as your "second" home as of the purchase date.

If you sell your "second" home during the year, you can substitute another home as your "second" home as of the sale date. This presumes that you have a primary home and two or more "second" homes.