Deducting Origination Costs on Line of Credit

8 Replies

Does anyone know how you would deduct the costs of obtaining a line of credit?  For example, let's say I get a line of credit and I pay the following fees:

Attorney Fees: $500

Origination Fees: $750

Title Fees: $1,500

Could any of these fees be either deducted or capitalized when they're not associated with a specific rental property?  If so, what would be the proper way to do it?

Thanks in advance.

@Paul C.   great topic. I am not sure so I will monitor and see what advice is given.

Paul

What are the funds used for? Or is a continuous line of credit?

Amortized out over the length of the line of credit. Or deducted over the time frame of the items purchased.  For example if you purchase a property and it is depreciated over 27.5 years. You will amortize that cost over that term with the property.

Thanks @Steven Hamilton II

It is a continuous line of credit that would be used to buy stocks, private partnerships and properties.

Since only a portion of the line would be used to buy properties (possibly multiple), would I just amortize all of the loan origination costs on the first property I buy with the line?

Investment interest on Schedule A. If its on your primary residence it is limited to 100k. The amount above must be treated as investment interest. 

Steven is the tax man! And, if you comingle funds, like buying a car for your personal use, you'll need to adjust that loan basis. Comingling those can cause nightmares on past depreciation taken, I suggest you decide what the funds are to be used for, allocate the loan costs properly and don't change your mind in the future. :) 

I'd like to point out that it does not have to be treated as interest expense. Typically you would amortize loan origination fees related to a revolving line of credit over the life of the loan. 

Should you decide to convert your revolving line of credit to a term loan, the lender would recognize the unamortized net fees or costs as an adjustment of yield using the interest method. 

If you want to classify the origination fees as interest expense, you can, you just need to disclose that in your statement of accounting policy.

If you'd like to read more, go to page "FAS91-7" of the document below and look at #20 part B. It discusses what I just told you in a bit more detail.

http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820925889&blobheader=application%2Fpdf

@Brandon Hall - The FASB that you referenced relates to the Lending and loan purchasing. Do we assume that the treatment by the borrower mirrors that of the lendor? And if the "life" of the loan is contractually 1 year, to be renewed annually for a processing fee after financial review, is the "life of the loan" one year?

I have the same situation, where I've got a HELOC on a Rental Property that will eventually be used to either purchase property or as a down payment on rental property. We have no "statement of accounting policy", and because we haven't drawn on the revolving line, we have no interest expense yet. But I'm assuming that we can write the origination costs off as a "rental business expense" as it will be used to engage in rental real estate practices.

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