Rental Property Acquisition and Closing Costs vs Acquisition Financing Costs - Enter as One Asset or Two Separate Assets?

Forum|Forum|4 years ago
March 13, 2022
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For amortization/depreciation purposes on a rental property for the year of acquisition, should you enter the property cost together with associated depreciable closing costs as one asset and then add a second intangible asset for the depreciable acquisition financing costs? That seems to make sense initially since the acquisition financing costs will have a different useful life (e.g., for a 15 year mortgage, it's 15 years) while the useful life of the rental property itself is set at 27.5 years. Also, if you end up refinancing the acquisition loan with a different lender a few years later, you could then retire that separate intangible asset that you set up for the acquisition financing costs and take the remaining unamortized portion of those costs as an expense in the year of refinancing without affecting the continued amortization of the property cost asset itself. Does that all sound correct?

TurboTax Home & Biz Windows

ColeenD3

You add all the closing costs to the basis of the purchased building and depreciate that amount as one asset.

GarySAuthor

Hi Collen - thanks for your prompt reply, but that approach raises 2 questions:

First, if the acquisition financing costs are included with the property cost and other closing costs, does that mean the acquisition financing costs end up getting amortized over 27.5 years like the rest of the acquisition costs, even if it's a 15 year mortgage?

Second, I understand that you can expense the unamortized portion of financing costs for a rental property loan when that loan is refinanced with a different lender. Does that mean that TurboTax will allow you to break out the acquisition financing costs that were bundled into the property basis for the year of acquisition so that you can expense them for the year the loan is refinanced?

Thanks,

Gary

ColeenD3

Normally, it is added to the basis of the property, but it does make it tricky upon refinance. Please see this answer from @Carl11_2.

It depends if you need to actually enter the refinance cost yourself, or if the program does it "for you". I am assuming you refinanced this property while it was classified as a rental, and not while it was your primary residence, 2nd home, or other "personal use" type. Lots of information here. So don't try to absorb it all at once. I'll present it in pieces, so you can deal with it in pieces.

As you know, refi costs are amortized (not capitalized) and deducted (not depreciated) over the life of the loan. So you may first need to deal with your finance cost from the original loan.

- Basically, if you refinanced with a *different* lender, then any remaining financing cost from that original lender are fully deductible on your 2020 tax return. If this is your case, let me know and I'll provide you the property way to do this in the TurboTax program.

- If you refinanced with the same lender, then your financing cost on the original loan are "not" fully deductible in the year you refi with that same lender. You just leave those costs alone and they will continue to amortize over the remaining life span of that original loan, "as if" you did not refinance.

Now, check the list of assets in the Assets/Depreciation section and make sure that the refinancing cost for the "new" loan are "in fact" not there. If they are there, you're done and can stop reading now. Otherwise....

-On the Your Property Assets" screen click the Add an Asset button.

- Select Intangibles, Other Property and continue.

- Select Amortizable Intangibles, and continue.

- Describe this Asset: Enter something like "refinancing loan costs"

- Cost: Enter the total of your refi costs

- Date purchased or acquired: Enter the closing date of the new loan.

- Click continue

- Select that you purchased this asset new, and that it was used 100% for this business. Then enter the closing date of the loan and click continue.

- For the code section, select 163:Loan Fees and then continue.

- Useful life in years is the term of the loan. Typically this will be 15 years or 30 years. Then continue.

- This puts you on the Asset Summary screen. You can see the details here if you like. But you "MUST" click the DONE button on this screen, in order to actually save this entry.

That does it.

mikelipsky

It's great you bring this topic up because advice everywhere on the internet is to simply and indiscriminately add all closing costs to the basis and depreciate over 27.5 years. Like you mentioned, the IRS explicitly states in their Rental Property publication that you cannot include in your basis "charges connected with getting or refinancing a loan". Therefore, Financing Closing Costs should be separated from all other Closing Costs, not added to the basis, and amortized over the life of the loan (typically 30 years).

NewbieRentalOwner

This thread is so helpful – thank you!

My related question is – how do I handle the commission for the Real Estate buyers agent for a rental property I purchased? Is this a cost of property acquisition to be added to the basis?
The IRS publication for rentals does not specifically mention it as a cost that gets added to the basis, nor does it mention it as a cost that does not get added to the basis. The publication does not mention it at all. The instructions for schedule E deductions do, however, specify that Real estate agent commissions are not included in annual expenses to be deducted. (You Cannot simply deduct the entire commission as an expense in the year you purchased the property.) So I’m not sure how to handle this.
Thank you in advance anyone who could provide some help.