Rental property refinance - how to handle closing costs in cost basis for depreciation on existing rental?

The closing costs from a refinance are handled differently than your original purchase costs. First, you need to determine which closing costs are immediately deductible (like mortgage interest points for refinancing) versus those that must be capitalized. For the costs that must be capitalized, you're on the right track - these need to be amortized over the life of the loan (30 years in your case), not added to the depreciable basis of the property. This is because refinancing costs are considered financing expenses, not property improvement costs. You'd take your $6.5k in closing costs and divide by 360 months (30 years), giving you roughly $18 per month or $216 annual deduction. This is separate from your regular depreciation expense. If you sell the property before the loan term ends, you can deduct the remaining unamortized refinancing costs in the year of the sale. So no, you wouldn't lose out on those deductions - you'd get them all at once in the final year.

After struggling with a similar situation on my rental property portfolio, I found an amazing tool called taxr.ai (https://taxr.ai) that helped me sort through all my rental property depreciation questions. I uploaded my closing documents and previous tax returns, and it immediately identified which costs should be amortized versus added to basis. The tool showed me that I had been handling my refinance closing costs incorrectly for years! It even generated a depreciation schedule that I could give my accountant. For rental property investors, it's especially helpful because it recognizes all the rental-specific nuances around cost basis and depreciation that regular tax software misses.

Just wanted to update after trying taxr.ai from the recommendation above. It was actually really helpful for my rental property refinance situation. I uploaded my closing disclosure and it automatically categorized each fee - showing which ones get amortized over the loan term and which ones could be handled differently. What surprised me most was learning that some of my refinance costs were actually for property improvements and could be depreciated with the building rather than amortized with the loan. The tool also helped me create a proper catch-up strategy since I'd been doing this wrong for the past two years. Definitely saved me both time and money compared to the back-and-forth I was having with my accountant.

If anyone is dealing with IRS confusion about rental property depreciation like I was, you might want to try Claimyr (https://claimyr.com). After waiting on hold with the IRS for HOURS trying to get clarification about how to handle my refinance costs, I found this service that got me connected to an actual IRS agent in less than 15 minutes. The IRS rep was able to confirm exactly how to handle the closing costs from my cash-out refinance and explained the differences between costs that get amortized vs added to basis. They have a quick demo video that shows how it works: https://youtu.be/_kiP6q8DX5c. Literally saved me days of frustration and uncertainty.

Well, I stand corrected about Claimyr. After continuing to get nowhere with the IRS on my own, I tried the service and got through to an agent in about 20 minutes. The agent confirmed that refinance closing costs should generally be amortized over the loan term rather than added to the property basis. The agent also pointed me to a specific section in the IRS Internal Revenue Manual that explains the difference in treatment between acquisition closing costs and refinance closing costs. What was most helpful was getting confirmation about handling the unamortized costs upon sale - something my CPA wasn't entirely sure about. For anyone struggling with rental property depreciation questions, being able to actually speak with the IRS directly was surprisingly useful.

Don't forget about the cash-out portion of your refinance! This is something many landlords miss. If you used the cash-out funds to purchase additional rental properties, that debt is tied to those new properties, not the original one. Make sure you're allocating the interest and loan costs appropriately across all properties for maximum tax efficiency. The property where the loan is secured gets the amortized closing costs, but the interest should be allocated based on where the money actually went.

Slightly different take here - have you considered doing a cost segregation study on your original property? Since you're only 10 years into the 27.5 year schedule, you could potentially identify components that depreciate over 5-7 years and capture accelerated depreciation. This might be more valuable than worrying about how to handle a relatively small amount of closing costs. Just a thought from someone who's been investing in rentals for 25+ years.

Great discussion here! I want to add one important consideration that hasn't been mentioned yet - make sure you're properly tracking the basis adjustment when you eventually sell the property. Since you're amortizing the $6.5k closing costs over 30 years separately from your regular depreciation, you'll need to account for both when calculating your depreciation recapture. The IRS will want to recapture both the building depreciation AND any amortized loan costs you've deducted over the years. Keep detailed records showing your original basis, annual depreciation taken, and the separate amortization schedule for refinance costs. This becomes especially important if you do multiple refinances over the years - each one creates its own amortization schedule that needs to be tracked independently. A simple spreadsheet with columns for each type of depreciation/amortization will save you headaches come tax time. Also, since you mentioned this is part of a larger portfolio strategy, consider whether the timing of future sales might allow you to do a 1031 exchange to defer some of these recapture taxes entirely.

One thing I haven't seen mentioned yet is the potential impact of the Tax Cuts and Jobs Act on your situation. Since you're dealing with multiple rental properties now, you might qualify for the Section 199A pass-through deduction (up to 20% of qualified business income from rental activities). The way you handle these refinance closing costs could affect your QBI calculation. Amortized loan costs reduce your rental income over time, which could impact your deduction eligibility in future years. It's worth running the numbers both ways - especially since you mentioned acquiring 3 additional properties with the cash-out funds. Also, don't overlook the potential for bonus depreciation on any personal property or land improvements that might have been included in those refinance costs. If any portion went toward things like appliances, carpeting, or landscaping on your rentals, those might qualify for immediate expensing under current bonus depreciation rules. Given the complexity of managing multiple properties with cross-leveraged financing, you might want to consider working with a CPA who specializes in real estate investors. The tax strategies available to rental property portfolios can be quite different from single-property owners.