Rental Expenses - Depreciation of Mortgage Costs - Refinance Scenario

[DoubleDee]

A simplified scenario to help get my question across:

- I currently depreciate my closing costs for my rental property when I purchased it

- I depreciated costs over 30 years, the term of my original loan. 

- Assume original costs were $5000

- Assume last year was 15th year, meaning I have depreciated $2500 and have $2500 left to depreciate over the remaining 15 years.

If I refinance this year (30yr) and incur closing costs of say $3000, for my current tax year:

- Do I recoup the remaining $2500 cost as a straight expense (not depreciated) from the original loan and then set up another 30 yr depreciation schedule for the refinanced costs?  Or must I maintain two depreciation schedules for the two different costs?

I guess this question can go for any depreciated asset like a car/fridge etc. that we get rid of prior to it it being fully depreciated.

[RayW7]

Mortgage cost are added to the basis of your property.  When you refinanced  the original fees that were added to your basis do not change.   The basis in your property will be used when you sell the property to determine any gain or loss on the sale.

The costs associated with obtaining a mortgage on rental property are amortized (spread out) over the life of the loan. For example, if it cost you $3,000 to refinance your 30-year mortgage, you'd be able to deduct $100 per year for the next 30 years.

[DoubleDee]

Hi RayW7,

I'm partially following you ... but let's focus on the last part of your reply regarding deducting $100/per for the next 30 years on a $3000 cost for a 30yr loan.

Say at year 10 you refinance.  You've had taken $1000 in total deductions at that point ($100 x 10 years).  We have $2000 left to deduct ($3000 - $1000) at that time.  Can I deduct this remaining $2000 in whole in the year I re-finance and then start deducting the costs of the refinance in the same manner as the original costs?

[RayW7]

In the year you refinance to a new loan (and retire the prior loan), any existing refinance fees from any prior refinances become an expense and need to be entered in as "Other Expense" item. If the mortgage is financed with the same lender, the unamortized fees on the first loan must be deducted over the term of the new loan.

[edited 1/21/2021]|17:15pst

[DoubleDee]

Thanks RayW7,

Just so I understand using our example of $3000 cost for the original loan. After 10 years we have $2000 left to depreciate.

When I refinance (with another lender), that $2000 becomes an "other expense" and the cost of the new loan becomes another depreciable expense for the length of the new loan.

Did I understand correctly?

[DianeW777 · Accepted solution]

Yes, as long as it is a completely new and different lender. As stated by @RayW7, using the same lender you would add the remaining $2,000, in your example, to the new closing costs, then amortize the combined balance over the life of the new loan.

[DoubleDee]

Thanks @DianeW777 for clarifying.