Although you cannot generally deduct costs associated with purchasing or refinancing your personal residence, you can normally deduct the closing and refinancing costs associated with a rental property. The difference is that your rental activities are part of a trade or business intended to generate a profit. The IRS allows business owners of whatever stripe to deduct legitimate and ordinary costs of doing business, including interest, closing and refinance charges on rental real estate. The precise procedure you use to deduct these costs depends on whether you own the real estate within a sole proprietorship, partnership, S-corporation or C-corporation. However, you cannot normally deduct the whole fee at once. Instead, you must spread your deduction over the expected useful life of the property in a process called "amortization."
Total up your fees for closing costs and related expenses to secure the new mortgage. Combine that figure with all your other capital expenditures for the year. This includes any expenditure you made to improve the property or your profitability in the property, minus deductions for minor and routine repairs.
Obtain or download a copy of IRS Form 4562. This form helps you calculate the amount of capital expenses you may claim in the current year for depreciation -- or the gradual decline in the expected value of the property as it nears the end of its useful life -- and amortization, which is the process of spreading your capital expenditures over the life of the property.
Complete Section IV of Form 4562. Enter your new expenses for your property on Line 23. Note that your tax basis in the property increased with the expenditure on the fee to acquire the loan. However, the amortization process will gradually lower your basis, all other things being equal, even as it lowers your tax bill.
Attach the completed Form 4562 to your tax return. If you file as an individual, then attach it to your Form 1040. If you own the property as part of an S-corporation, attach the form to your Form 1120 S. Do the same if you own the property in an LLC and you elected to have the IRS tax you as a corporation. If you own the property in a C corporation, then attach Form 4562 to your Form 1120, Corporate Tax Return.
Depreciation and amortization are advanced tax planning topics. There are several different methods for depreciating property. You may wish to consider obtaining the advice of a qualified tax professional for information pertaining to your specific situation.
- Depreciation and amortization are advanced tax planning topics. There are several different methods for depreciating property. You may wish to consider obtaining the advice of a qualified tax professional for information pertaining to your specific situation.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.