Unamortized Points - Rental Property

[JohnH]

This seems odd to me, but maybe I'm just not thinking clearly.  Client bought a rental property in 2010 and sold at a sizable loss in 2017.  We had been amortizing 11K in points paid when the property was originally purchased, so the unamortized points on a 30-year loan were down to about 8K.  My software shows the unamortized  points on Form 4797, Part I.  Part of me says "that's an odd place for them to show up", but the other part of me says "they have to go somewhere - may as well be there".  Does anyone think I should handle the points differently?

[Abby Normal]

Override the amortization for this year to take the entire amount left in 17. Delete the asset next year.

[Lee B]

I have always disposed of the asset and let it flow thru the 4797 to line 14 on the 1040.

I have done this many times without any problems.

[JohnH]

Thanks.  After giving it some more thought, I suppose the 4797 is the logical place for the unamortized points to go.  

I think I was expecting them to show up on the Schedule E for some reason.  Probably because unamortized points on a home mortgage show up on the Schedule A (same form where the annual amortization deduction is taken). 

Anyhow, thanks to both of you for the replies.  Makes me more confident in accepting how the software handled it. 

[jklcpa]

I agree with Abby that the proper reporting is as he described. Points aren't part of basis, so I'd say that they don't belong on the 4797. The amortization of points is an expense that is deducted ratably over time, again not part of basis.  The law says that remaining unamortized points are to be deducted when the related loan terminates by events such as payoff, refi, foreclosure.

[JohnH]

After sleeping on it, I went back and double checked everything this morning just to be sure I'm not missing anything. With a 6/17 sale date, my software (Drake), reports the pro-rata amount of current year points on the schedule E, but then reports the unamortized points on the 4797 with a zero selling price.  I'm not sure it makes a difference on this return because the client has large suspended losses and also a large capital loss on the property (even after adjusting basis for depreciation).  But if there were capital gains on the sale, it would matter whether the pints were on the Schedule E or the 4797. 

[Lee B]

13 hours ago, jklcpa said:

I agree with Abby that the proper reporting is as he described. Points aren't part of basis, so I'd say that they don't belong on the 4797. The amortization of points is an expense that is deducted ratably over time, again not part of basis.  The law says that remaining unamortized points are to be deducted when the related loan terminates by events such as payoff, refi, foreclosure.

If that's the case, why has tax software been reporting the disposition of unamortized  stuff on the 4797 for years.

Never had a problem with doing it this way.

[Gail in Virginia]

4 hours ago, JohnH said:

it would matter whether the pints were on the Schedule E or the 4797. 

I'll take my pints anywhere I can get them. 

[jklcpa]

42 minutes ago, cbslee said:

If that's the case, why has tax software been reporting the disposition of unamortized  stuff on the 4797 for years.

Never had a problem with doing it this way.

Well, I'm not a programmer but I'll take a wild guess that it is flowing there because it is an item listed on the depreciation schedule, however that doesn't make it the correct reporting.  All of the programs I've used over the years allow some flexibility by providing the preparer with check boxes to stop some items on the depreciation schedule from flowing to the wrong form, line, or section of a form, and will be labeled something like "do not include on 4797" or  "not sec 1245 property", etc.

If the loan was paid off in a transaction that was not part of the sale, we wouldn't even be having this discussion, and all should agree that the proper reporting would be to deduct the remaining unamortized balance on Sch E in the year of payoff.  This is no different except that the loan's payoff affected the final net cash due to/from the seller because it was included in the sale's settlement transaction.  

As I said before, it's an item that the law specifically says is NOT basis, nor is it an improvement or an expense of sale, so I see no justification for reporting it on the 4797.  And as John said, in some cases, it may make a difference on some returns.

 

 

 

[JohnH]

2 hours ago, Gail in Virginia said:

I'll take my pints anywhere I can get them. 

After all the time I've spent staring at this return, I think a couple of pints are in order.

 

[Catherine]

21 hours ago, Gail in Virginia said:

I'll take my pints anywhere I can get them. 

Love it, Gail!

[michaelmars]

Abby has the correct answer.