Closing costs on bridge loan

[schirallicpa]

Deductible now?  This loan is terminated in one year: Granted in Dec 2023 and terminates in Dec 2024 with new mortgage.  

[Lee B]

What kind of property is this, personal, investment, rental or business?

Was this a purchase or a refinance?

What were the proceeds used for, interest tracing rules do apply?

[schirallicpa]

This is for rental property.  It is not passive - this guy rents on the big scale.  This is for a refinance.  Proceeds are used mostly for capital expenditures to upgrade property. 

[DANRVAN]

3 hours ago, schirallicpa said:

Deductible now? 

Deductible closing cost include: prepaid interest, points,  property tax, origination fees, and mortgage insurance premiums.  Otherwise they are capitalized.

 

[Abby Normal]

1 hour ago, DANRVAN said:

Deductible closing cost include: prepaid interest, points,  property tax, origination fees, and mortgage insurance premiums.  Otherwise they are capitalized.

 

That's for Sch A. On Sch E, everything is either currently deductible or amortized. These cost may have to be set op to be amortized in 2023 then written off completely when the loan is refinanced in 2024.

[BulldogTom]

1 hour ago, DANRVAN said:

Deductible closing cost include: prepaid interest, points,  property tax, origination fees, and mortgage insurance premiums.  Otherwise they are capitalized.

 

Agree, but my question is:  Are the other costs capitalized for 1 year?   Or are they part of the larger financing package and added to the closing costs of the permanent loan?   Or are they an addition to basis and capitalized over the life of the asset?

Tom
Longview, TX

[schirallicpa]

Tom - that's basically my question.  These costs are significant, but I am not finding any guidance.  My thought is that it is in essence part of the larger refinancing and should be capitalized and then added to next years closing costs.  But - maybe......not.

[BulldogTom]

5 minutes ago, schirallicpa said:

Tom - that's basically my question.  These costs are significant, but I am not finding any guidance.  My thought is that it is in essence part of the larger refinancing and should be capitalized and then added to next years closing costs.  But - maybe......not.

I looked around on my lunch break for some guidance and did not find any either, but it was not an extensive search.   If it was not part of the larger financing plan going in, I would not have a problem amortizing over 12 months, but something is tickling the back of my brain that it needs to go to the basis of the property, and I don't know why I keep leaning that way.   Like it is part of the construction costs.  I just can't put my finger on the rule that is leading my thoughts that way.

Tom
Longview, TX

[Lee B]

I agree, If the client's original intent was to obtain long term financing and the bridge loan was just a step forward in that process then the the closing costs from

both loans should be combined.

[DANRVAN]

9 hours ago, schirallicpa said:

added to next years closing costs

Are you talking about loan fees, which are amortized over the life of the loan, or actual closing cost?

9 hours ago, Abby Normal said:

Sch A. On Sch E, everything is either currently deductible or amortized.

If we are talking about actual closing cost, I am not aware of any that would be allowed on E but not A (if that is what you are saying).

Nondeductible closing cost are capitalized and become part of basis to the property.

IRS seems to agree per https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expenses :

"Question

I purchased a rental property last year. What closing costs can I deduct?

Answer

Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes.

Many other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including:

Abstract fees

Charges for installing utility services

Legal fees

Recording fees

Surveys

Transfer taxes

Title insurance

Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, sales commissions and charges for improvements or repairs)."

 

[schirallicpa]

You're right DANRVAN - added to basis and not amortized.