Rental refinance

[Kea]

Client is renting out their house (100% rental). In 2011 they refinanced to a 10 year loan. I know the points they paid can be amortized over the 10 years. The original closing costs were added to the basis. But I'm not sure what to do about the refinance closing costs (not related to interest, property taxes, etc.) -- just the fees to do the refinance. Do I spread them over the remaining 24 years of the oringal depreciation? Do they start a new 27.5 year depreciation?

Thanks so much

[TaxCPANY]

According to Steven Melnik's article in the May, 2004 issue of 'The CPA Journal,' Kea, those fees are amortizable over the (10-year) life of the loan -- NOT the depreciable life of the property. While this is not a "definitive" cite, it echoes what I recall doing for clients who rented-out their residences when they posted overseas -- and, at the direction of the Big Four firm I worked for, at the time. (Sorry; it's too late for me to plunge into the IRC or its regs to provide 'real' authority.)

[Kea]

Thanks. I did try to look at the regs. And I'm sure I missed something by not looking in the right place. But the only closing cost reference I saw was for the original purchase. The only thing I saw regarding refinance was for the points.

Since it's a refinance, I wouldn't think it should go to basis (but could be wrong). Spreading it over the life of the loan makes sense.

[jainen]

>>Spreading it over the life of the loan makes sense.<<

How does that make sense? I challenge anyone to find some actual authority for it, or even in a standard tax guide.

To the extent the refinance is acquisition debt, related costs are treated exactly like the same costs for acquisition debt.

Of course to the extent it is not acquisition debt, nothing at all is deductible. Oh, I suppose there is the possibility of cash out for operating expenses, but people don't often use a mortgage to pay utilities.

[Kea]

Perhaps "makes sense" was a poor choice of words.

Nothing was taken out at refinance to pay any other bills. The refinance was higher than the previous balance but only due to the cost of closing costs.

So if treated like acquistion debt, does it get its own new 27.5 year depreciation? Or, is it spread over the remaining 24 years of the original depreciation?

[jainen]

>>new 27.5 year depreciation<<

When you remodel, the addition to basis is depreciable over 27.5. But this cost of financing is an intangible with no determinable life. It gets capitalized with no write-offs until gain/loss is determined on disposition.

[OldJack]

>>But this cost of financing is an intangible with no determinable life.<<

I don't believe closing and refinancing costs are an intangible.

>>Examples of capital expenditures include: Costs OTHER than interest incurred to borrow funds and OTHER finance cost are capital expenditures to be amortized over the life of the loan. This applies to commissions and other fees paid to get a loan, cost of issuing bonds, including legal fees and printing, cost and finder's fees and commissions paid by a lender to get borrowers. Taxpayers can elect to capitalize interest under code sec. 266 only after applying the uniform capitalization rules for interest under code sec. 263A. RIA Federal Tax Handbook 2012, page 202, Paragraph 1653.<<

As I understand the post this is a loan/mortgage for business rental property and not a private residence.

[Kea]

It is a single family residence that was the clients' home. They moved to another house and could not sell this one. They put it into rental service and has remained so.

[OldJack]

It is a single family residence that was the clients' home. They moved to another house and could not sell this one. They put it into rental service and has remained so.

On the day it was rented it became/converted to business rental property. The refinance was as business rental property and not a personal residence.

[Kea]

Agreed - just spelling out the history.