What Can Be Deducted When Refinancing Rental Property?
If you refinanced your rental property you may be able to deduct some of the expenses you paid in connection with securing the loan.
Unlike primary residences, you can deduct more than qualified points and interest.
The fees are typically deductible over the term of the loan, unless they are related to a refinance for a substantial improvement of the property. In this case, they can be deducted in the year of the loan.
For more information on refinancing for home improvements click Can I Fully Deduct Points Paid on a Refinance?
The following sections expand on some questions regarding refinancing rental property:
Can I deduct all of the settlement charges when I refinanced my rental unit?
You can deduct any settlement charges that were in connection with securing the loan for your rental unit.
Some of the expenses you can deduct are:
- Underwriting fees
- Appraisal fees
- Attorney fees
- Title search fees
- Mortgage commissions
- Abstract fees
- Recording fees
- Bank fees
- Notary fees
These fees must be prorated over the term of the loan.
For example, you refinanced your rental on February 1st. Your loan term was for 30 years. Your settlement statement shows the following expenses:
Points - $3,000, underwriting fees- $500, appraisal - $500.00, notary fees - $250.00, mortgage commissions - $3,000. Total costs are $7,250.00.
Your total expenses for the year would be $221.54 ($7250/360 months = 20.14 x 11 months). For the following year, you would amortize the entire 12 month period so your total would be $20.14 x 12 = $241.68.
If your refinance is related to a substantial improvement of your rental unit, you may be able to deduct the portion of the charges related to the improvement in full.
For example, you took out a loan for $300,000 and you used $100,000 (1/3) for your pool and landscaping. Your eligible expenses total $7,250.00. You would be able to deduct 1/3 of the expenses related to the home improvements or $2,416.67 ($7250/3).
When I refinance a rental property, how do I report the old finance charges?
If you have old charges from your previous loan and you refinanced again, whether or not you can deduct the entire balance in the current year depends on if you refinanced with the same lender or a new lender.
- If you refinanced with a new lender you may be able to deduct the un-amortized balance of charges in full in the year you refinanced.
For instance, your total charges from your old loan were $7,250.00. At the end of previous year you amortized $250.00 of your old charges. You will be able to deduct $7,000 of your balance in full on your current year tax return.
To do this, please follow the program instructions on the screen telling you how to enter the balance as an override.
- If, however, you refinanced with the same lender, you must deduct the unamortized balance over the life of the new loan. Using the same example as above, your unamortized balance of $7,000 must be deducted over the life of the new loan. So if the new loan was a 30 year loan, you would be able to deduct 19.44/month (7,000/360 months). Your deduction for 12 months would be 19.44 x 12= 233.33.