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What code section do you put loan fees on rental properties?

Customer Question
Regarding loan fees on rental...

Regarding loan fees on rental properties. Publication 527 basically just says to deduct points over the life of the loan. It makes it sound like you just add it to interest expense. But it looks like most people, from what I see by researching this question, put it on Form 4562 Part VI as Amortization, but then no one seems to know the code section to use under (d). Instructions for Form 4562 gives a list of what items can be amortized, and loan fees/ points is not one of them. Do you know the proper way to handle this? Thank you.

Submitted: 5 years ago.Category: Tax
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2/1/2012
Tax Professional: Jax Tax, Tax Attorney replied 5 years ago
Jax Tax
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Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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It is actually capitalized. This means added to the basis on the home and depreciated with the home value.

Customer:

Expenses paid to obtain a mortgage. Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property.

The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. These charges are also called loan origination fees, maximum loan charges, or premium charges. Any of these charges (points) that are solely for the use of money are interest. Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan.

So if these are loan origination costs and appraisal fees?

Jax Tax:

That is correct

Customer:

What is correct? My fees are origination fees and appraisal costs?

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Tax Professional: Stephen G., Sr Income Tax Expert replied 5 years ago
Stephen G.
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Hi and thanks for using our service. I'll do my best to give you a complete and accurate answer. Please ask me to clarify anything you don't understand.

Points are computed as a percentage of the loan amount. So if you have fees they are computed that way (such as origination fees) they must be amortized over the life of the loan. These points are often reflected in the 4562 as a manner of convenience so that the amortization doesn't get overlooked.

If you choose to do it this way, the applicable Internal Revenue Code Section is 463(g) & that's what should be entered in column (d) on the amortization schedule.

I hope this clarifies the answer to your question. If you have further questions on this matter, or anything else, please don't hesitate to ask.

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Customer reply replied 5 years ago

Since Pub 527 classified points as prepaid interest, I was going to add it to interest. But then I didn't know what to do with the appraisal fees. Pub 527 specifically states I cannot add appraisal fees to the basis of the property, so I am beginning to think it is not deductible at all.

What you are saying about the points is that I can use the amortization part of Form 4562 so that the points don't get forgotten about in future years?

Can I do it either way? Or should I add the points and the appraisal together and use Form 4562?

Tax Professional: Stephen G., Sr Income Tax Expert replied 5 years ago

Yes you can do it either way. Personally, I would put the points on the 4562. As stated, that would keep the amortization available each year without having to remember to pull the number out of your worksheet.

As far as the appraisal fees are concerned, you are correct that they shouldn't be added to the property; as far as I'm concerned and there are several examples of this on various websites, the appraisal fees are part of the financing costs all of which should be amortized over the life of the loan on a straight-line basis. In fact, as you mentioned, I would combine the points, appraisal fees & any other financing costs and use the amortization section of the 4562 to expense them over the life of the loan. I'd identify them as "Financing costs & points".

I hope this clears up the answers to your questions.

Stephen G.
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