How to Add Refinance Costs to a Property's Cost Basis

Question

Hey Everyone! I've been working through Brandon Hall's guide to the treatment of closing costs (link) while finishing up a refinance, and I think I have everything figured out except when he says that some costs are "Added to the cost basis of the property and depreciated". How would I do that in my bookkeeping software? My first guess is that I sum all those amounts up and then create a new fixed asset that depreciates at 27.5 years (for SFR), but then use the refinance close data as the depreciation start date. Is that correct? Or is there something I have to do with the original fixed asset purchase amount? Many thanks in advance!

Tony Kim · Answer

That's correct. So you'd basically have two depreciation schedules going on.  One for when you initially purchased the property, and the second for when you did your refinance. Each instance would have their own 27.5 year amort schedule. Below is a screenshot from the schedule I created for one of my properties. where I remodeled and refi'd in 2019, and another remodel in 2021.

Michael Plaks · Answer

Loan costs are not depreciated over 27.5 years, they are amortized over the life of the loan.

Ashish Acharya · Answer

• Normally, the unamortized balance of old loan costs becomes currently deductible. Loan costs incurred in obtaining the new loan must be capitalized and recovered over the term of the new loan.

• If you're refinancing your mortgage for the second time, the portion of the points on the first refinanced mortgage that you haven't yet deducted may be deductible at the time of the second refinancing. However, if the mortgage loan is refinanced with the same lender, the remaining balance of capitalized points must be deducted over the term of the new loan, not in the year the first mortgage end.

• However, fees paid to obtain the new mortgage aren't deductible, nor can you add them to your basis in your home to reduce the gain when you sell it. Examples of such nondeductible fees are credit report fees, loan origination fees, and appraisal fees.

• A taxpayer can deduct points paid to acquire a mortgage on a property that the taxpayer used both as his principal residence and as a rental property (he rented out a portion of the property to tenants). There is no prohibition on the current deductibility of points with respect to a principal residence that is also used (either partially or substantially) for rental purposes.

Tony Kim · Answer

I agree, and thanks for the correction Michael. It should have been 30 years for the refi costs.

Tony Kim · Answer

Agree, it should have been over 30 years (no wonder TT was calculating a slightly different amount, lol).

Depreciation can be considered a 'form' of amortization. They are not one and the same obviously, but amortization occurs for things like the question the OP posted. I'm not exactly sure how one would "combine amortization and depreciation" because that makes no sense to me at all. What DOES comply with GAAP is adding eligible refinance costs to the total basis of your property and aggregating the annual depreciation of those capitalized refinance costs as well as all costs associated with the original purchase of the property and then COMBINING them together to get your annual cash-less depreciation expense. Even though one schedule is on a 27.5 year schedule and the other is on a 30 year schedule, they are still aggregated together. Are you saying that's not GAAP?

Greg Scott · Answer

Tony's table was not done correctly.  @Michael Plaks has the answer I agree with; it is the life of the loan.  So, if you have a 30 year loan, you amortize over 30 years.  If the loan is a 5 year balloon, you amortize over 5 years.

Amortization is NOT the same thing as Depreciation.  Combining them does not comply with GAAP. (Generally Accepted Accounting Principles)

Michael Myers · Answer

Yes, thanks @Michael Plaks. I knew what to do with the loan costs, was just trying to make sure I knew what to do with the "non-loan costs" associated with the refinance such as transfer taxes, title insurance, settlement fees, etc.

Michael Myers · Answer

@Tony Kim awesome, that's what I just implemented into my bookkeeping. Thanks for the clear and concise answer!

Michael Myers · Answer

@Greg Scott thanks! So sounds like my first intuition of making a new asset then depreciating was correct? From Brandon's article it seems like he's under the impression that certain things like title charges (settlement fees, title insurance, etc.) and government recording and transfer charges get added to the property cost basis and depreciated over the life of the property as opposed to amortized over the life of the loan; is that not the case in your experience?

Greg Scott · Answer

Typically you capitalize the loan costs and amortize them; you do not add them to the cost basis of the asset to change your depreciation schedule.

How to Add Refinance Costs to a Property's Cost Basis

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