I'm selling a rental home. Can I capture refinance fees in cost basis when calculating capital gains?

[gingy72]

The house was my residence from 2004 to 2013, became a rental in 2013 to current sale in 2018.  I refinanced it twice while it was my residence.  Can I add the fees from those refinances to cost basis or use them anywhere to reduce my capital gains?  Thank you!

[MinhT · Accepted solution]

Yes, these refinance fees can be added to the cost basis of your home.

Costs added to basis. Certain expenses paid in connection with the purchase or refinancing of a home, regardless of when paid, are capital expenses that must be added to the basis of the residence. These include attorney's fees, abstract fees, surveys, title insurance and recording or mortgage fees.

[gingy72]

I'd be adding it to my cost basis now (2018 tax year), changing the cost basis I established in 2013 when it became a rental.  Still ok?  

[MinhT]

The cost basis is the original purchase price plus improvements (if any) plus the costs added to basis as above.

[AlexB_]

I'm confused about refinance fees and the cost basis.

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.

[Vanessa A]

You are correct, under current tax law, fees for refinancing a mortgage are not included in your adjusted cost basis.

Fees for refinancing a rental property are amortized over the life of the loan for a rental property.  

If this is a personal property and not a rental property, refinancing fees are not at all deductible.

[speedytoll]

I've amortized the refinancing fees for a rental property in the past years as depreciation of type L asset (intangible), and I sold the rental property in 2021, can I deduct the remaining refinancing fees? If I enter 0 for the "Asset sale price", there's a validation error on the "Schedule E Wks -> Asset Wks -> Depositions box 21". If I leave it empty, TurboTax is not treating it as loss. 

[DaveF1006]

Yes, you should be able to expense the remaining amortization fees. I would follow the prescribed steps that are outlined in this Turbo Tax post written by view2.

1. Go to your rental asset summary page. Go to the assets entry and select loan fees or whatever you label you  named this entry.
2. Continue through several screens to "Tell us About this Rental Asset" Mark you sold and then the date paid off in the drop down screen.
3. Continue through several more screens to "Special Handling Required"
4. Click the  "YES" "Intangible asset not a 1245 property" is the reason.
5. Depreciation Deduction Amount" then select  "Transfer these fees for me to other Expenses" because the loan was paid off.

If you experience any issues, click on the hyperlink for the Turbo Tax post as there are plenty of helpful hints that mayny users shared in how they dealt with this entry.

@speedytoll