Do closing costs like title fees from a refinance increase basis?

[SamiaI]

Yes, they do increase basis if they are for your residence. These costs (appraisals, underwriter, attorney, or bank fees, title fees, etc.) are generally not deductible in a mortgage refinance.

For more information regarding mortgage refinance deduction, click here 

[AlexB_]

It seems that the IRS Publication 551 specifically states that refinance costs can't be added to the basis.

Could somebody please clarify this?

Here is a quote from Publication 551 (highlighting is mine):

Settlement costs.

our basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.

[...]

Settlement costs don't include amounts placed in escrow for the future payment of items such as taxes and insurance.

The following items are some settlement fees and closing costs you can't 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.

   1. Points (discount points, loan origination fees).

   2. Mortgage insurance premiums.

   3. Loan assumption fees.

   4. Cost of a credit report.

   5. Fees for an appraisal required by a lender.

5. Fees for refinancing a mortgage.

[DawnC]

No, you don't add them to the basis.   As you quoted from the IRS:

You can't include in your basis the fees and costs for getting a loan on the property.    A fee for buying property is a cost that must be paid even if you bought the property for cash.    They are not deductible for a personal residence, nor are they added to the basis.  

The article the user above posted explains that those costs may be deductible or capitalized if you are refinancing rental property (business property).  

@AlexB_

[AlexB_]

My situation is the primary residence that was converted to rental before selling it in 2021. We refinanced it once while it was still the primary residence in 2009 and once when it was rental, in 2015.

Here is what my understanding is then:

1. All fees not related to the loan, like title, recording etc. that we paid when originally purchased can be added to the cost basis.

2. The same kind of fees that we paid for  refinancing in 2009 (still primary) cannot be added to the basis.

3. The same fees we paid for refinancing in 2015 (rental) could be deducted/capitalized. But we didn't do it then. Does it mean that ship has sailed, or can we add them to the basis or selling expenses now?

[MarilynG1]

(1) No, you can't change the Cost Basis when reporting the sale of the Rental Property for fees you did not originally include in the Cost Basis when you set up your Rental Property.

(2) You are correct that you can't claim the refinance fees that you paid when the property was not a rental when you sell the rental property. You could have added them to the Cost Basis when you set up the Rental Property. 

(3) Yes, the fees you paid for refinancing your rental property (while it was a rental) can be added to the Cost Basis when Reporting the Sale of Rental Property, if you did not add them as a depreciable asset at that time.

They wouldn't be considered 'Sales Expenses' for the current sale. 

[AlexB_]

I'm confused about (1). My cost basis is purchase price + fees at the time of purchase. My depreciation basis for the rental was the Fair Market Value because at the time it was converted to rental its FMV was _significantly_ lower than the purchase price (after 2008 crash).

So, my gain should be selling price minus sale expenses minus taken/allowed depreciation minus purchase price minus purchase fees, right?

And then according to (3) I can also subtract refinance fees incurred while renting it?

Also, do the refinancing fees (incurred during the rental period) include only title/recording and such, or can loan-related fees also be included (origination/broker fee, appraisal, etc.)?

Thank you!

[DianeW777]

In your situation you do need to use the actual cost basis and not fair market value (FMV) to report the sale.  You can do this one of two ways.  

1. Add the additional amount as part of the sales expense if you are reporting the sale through the asset section (under the rental property assets). Include any sales expense, the difference between FMV and cost basis (should include purchase expenses).  Depreciation will be handled by TurboTax.
   • Your question: So, my gain should be selling price minus sale expenses minus taken/allowed depreciation minus purchase price minus purchase fees, right?  Answer: Yes
2. Indicate the property was removed from service (not sold) and record the depreciation for the prior and current year, then enter a Sale of Business Property separately outside of the rental activity (not recommended because it's not necessary). 
   • Keep all of your documentation with your tax return with details on how you arrived at the sales expenses if you choose option 1 (recommended).

Your Question: I can also subtract refinance fees incurred while renting it?

• The balance of the refinance fees in the year of sale are deducted as an expense for any portion that remains at the date of sale (has not been fully amortized).  It is not part of the sale but rather a rental activity expense.

@AlexB_

[Edited: 03/15/2022 | 7:18a PST]