I know that as a general rule, closing costs associated with the refinance of a rental property are added to the cost basis of the property for the calculation of depreciation. What if you role the closing costs of the refi into the new loan? Does this change the tax rules at all, or are they still added to cost basis, or not at all?
The general rule is that refinance costs are amortized, not depreciated.
When you refinance your investment property, your out of pocket closing costs are amortized over the life of the loan. If the refinance loan is a 30 year loan, then one-30th of the loan fees are expensed on Schedule E, line 18, each year. If you sell the property, then you expense the balance of the unamortized loan fees.
If you roll the refinance costs into the mortgage, then you did not pay anything out of pocket and do not get an amortization deduction. Instead, you get a slightly higher interest expense deduction than you might have had if you had paid the refinance costs out of pocket.
No adjustment to cost basis, and no change to the depreciation schedule.
Awesome response Dave, thanks a lot.
well, if you’re booking the refi, and you credit the note A/P you have to have something to debit. That’s either expense, prepaid expenses (to amortize as described) or increased cost basis. Even though you’re not “out of pocket,” you still have a deductible expense somewhere.
If it is a bookkeeping issue, capitalize the loan fees to an address-specific asset subaccount (for example, Intangibles: Loan Costs: 123 Main Street). These costs are amortized over the term of the loan. If the loan is paid off early, then the remaining balance on the intangible asset is immediately written-off.