Have a Tax Question? Ask a Tax Expert
You cannot include in your basis of the property the fees and costs for getting a loan on property.Instead - these costs are capitalized and amortized over the life of the loan and deducted the same way as loan interest.
We report amortization deduction on form 4652 (considered amortizable intangibles under IRC 197).
If the loan is paid off earlier - either with cash or because of refinancing - that is treated as disposition of that prior capitalized asset - and all remaining costs are deductible.However - in your situation - you woudl not be able to deduct a loss...
See the statute here
(f) Special rules
(1) Treatment of certain dispositions, etc.(A) In generalIf there is a disposition of any amortizable section 197 intangible acquired in a transaction or series of related transactions (or any such intangible becomes worthless) and one or more other amortizable section 197 intangibles acquired in such transaction or series of related transactions are retained—
(i) no loss shall be recognized by reason of such disposition (or such worthlessness), and
(ii) appropriate adjustments to the adjusted bases of such retained intangibles shall be made for any loss not recognized under clause (i).
So - you will report the sale of the loan obligations - the sale price woudl be remaining cost (not amortized yet) and teh basis - a part of closing cost related to the old loan which is closed.
If that result a loss - most likely - the loss is disallowed under section 197(f) and rolled over to the capitalized cost of refinancing of a new loan.
Let me know if you need any help with reporting.