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CL6
Level 2

Details about deducting mortgage costs on a rental property

In order to deduct mortgage costs on a rental property, do I have to pay all closing costs up front or can I roll those costs into the loan/mortgage?

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3 Replies
RayW7
Expert Alumni

Details about deducting mortgage costs on a rental property

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.

 

  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.

CL6
Level 2

Details about deducting mortgage costs on a rental property

Thanks for such a thorough reply. My primary question wasn't answered, though, and I also failed to say my question relates to refinancing a property I already own.

 

My primary question is: Are all the things you mention deductible *only* if I pay up-front (cash) for  the refinance costs, or can I still deduct the allowable items if I roll the refinance costs into the loan?

 

Thank you

DaveF1006
Employee Tax Expert

Details about deducting mortgage costs on a rental property

No, you will not be able to claim those costs upfront. Instead, these would be considered depreciable assets over the life of the loan.

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