Can you continue to amortize the refinance costs after the loan is paid off for a rental property?

[jessitbtx]

Here's the scenario: 

- In 2016, the taxpayer refinanced the mortgage for their rental property - let's assume the total 2016 refinance cost was $15,000

- The Refinance Costs was subsequently amortized over 30 years, therefore, the taxpayer has been deducting $500 per year in their tax return. This means, for the years 2016, 2017, 2018 and 2019, the taxpayer has in total deducted 4 years x $500 = $2,000 worth of amortized refinance costs; therefore, for 2020, they had $15,000 less $2,000 = $13,000 remaining balance of unamortized refinance costs.

- In 2020, the taxpayer refinanced that loan, paying it off in full, with a different lender. As a result, the taxpayer incurred new refinance costs, of say $10,000 related to the 2020 loan (also a 30 year mortgage) 

In Turbotax, it says that if the new loan (obtained in 2020) is with the same lender as the refinanced loan (from 2016), then the taxpayer IS REQUIRED to continue amortizing the 2016 refinance costs based on the terms of the new loan. In other words, the $13,000 is added to $10,000 = $23,000 which is then amortized over 30 years - or $767 amortized refinance costs per year.  

However, if the new loan was refinanced with a different lender, then the entire $13,000 could be all deducted in the same tax year. 

But here's my question: 

Assuming our taxpayer did the 2020 refinance with a different lender, can the taxpayer STILL CHOOSE to continue amortizing the 2016 Refinance cost's remaining balance of $13,000 "as if" they refinanced with the same lender?  

Or is the taxpayer forced to deduct the entire $13,000 as an expense in 2020? 

I'm asking this because, for some taxpayers, their income in 2020 wasn't very high and they expect higher income in the future. Therefore, the depreciation/amortization expense would be more beneficial to them in future years, than getting it all written off in 2020. 

So I just want to know if the taxpayer has the option to choose to continue amortizing previous Refinance costs instead of writing it all off in a single year.

Any insight would be great! Thanks. 

[JohnB5677]

Unfortunately No, the 2020 refinance with a different lender will require the $13,000  to be taken in the year it occurs.

If you refinanced the first refinance with the same lender, you can't deduct any remaining balance of points. Instead, deduct the remaining balance over the term of the new loan. 

[jessitbtx]

Thanks for the clarification! 

[phedwards2]

I actually paid off my rental property refinance loan early 5 years ago and have continued to amortize the original costs over the remaining 30 years.  Should I have expensed the whole remaining costs in the year I paid it off?   If so, am I now in trouble with the IRS and what should I do now?

[ColeenD3]

Yes, you should have expensed it the year it was paid off. You will have to file Form 3115 to make the corrections. It can be a difficult form and you may need professional assistance.

Please see this LINK for more information.

[phedwards2]

Good to know - thanks!   Can I fill in Form 3115 in TurboTax?  If so, how do I find it?

Thanks

Phil

[PattiF]

Yes, you are able to fill in Form 3115 in TurboTax Desktop. It is only available in that format. Even in the TurboTax Desktop, the form needs to be filled out in Forms mode with no guidance from the software. You would also need to start your tax return over in the Desktop version. It may be advised to seek guidance from a tax professional for the preparation of this form.

[phedwards2]

Ah I see.  I'm in Japan so can't buy TT Desktop here.  If I fill in a Form 3115 manually, would I need to specify anywhere in TT Online that I am filling in a Form 3115 offline?  And then could I e-file my TT return and e-file my Form 3115 separately?

Thanks

[ColeenD3]

Yes, you would have to fill out Form 3115 by hand. You do not need to indicate on your return that you are sending the form to the IRS.

See this LINK to see how to file Form 3115.

[phedwards2]

Well that link says "Taxpayers will still need to submit two copies of the Form 3115 to the IRS. Taxpayers must continue to file Form 3115 with their tax return (including extensions). However, instead of mailing the duplicate paper copy of Form 3115 to the IRS in Ogden, Utah, taxpayers can now fax it". 

So how can I file it with my TurboTax Tax Return, if I e-file?

Thanks

[ThomasM125]

@phedwards2

You would prepare form 8453 and include it with the form 3115 and mail to the IRS. Here is a link to the form:

Form 8453

[phedwards2]

Ah the plot thickens!  So do I e-file myTT return, fax Form 3115 and mail Form 8453?

Also is there somewhere in TT to note on my e-file that I'm also mailing Form 8453?

Thanks

[ColeenD3]

No. In certain circumstances, you will be prompted to say that you are including one. A 3115, since it is not in TurboTax Online. However, if you want to show the IRS you are sending one, you will have to switch to the Desktop version.