Tax Implications for Refinancing an Investment Property
Refinancing a mortgage allows you to cash-in on your equity, save money each month by reducing your interest rate or change the terms of your mortgage. Regardless of the reason you choose to refinance, you can usually save some money on your taxes by deducting some of the expenses incurred during the transaction. If you refinance an investment property, you must claim these expenses against your business income.
When you refinance a mortgage on an investment property, you can deduct any insurance premiums you paid in advance, as well as real-estate taxes paid at closing or during the year. You can also deduct the mortgage interest you paid on the investment property's mortgage, including any points or loan origination fees paid at closing. You cannot deduct any other fees you paid to obtain the mortgage.
You must claim deductions for insurance premiums and points in the year they actually apply. For example, if you closed your refinance loan in July 2013 and paid one year's insurance premiums up-front, you can deduct only the premiums that apply to July through December on your 2013 taxes. You must deduct the remainder on your 2014 return. Likewise, if you purchased points to reduce the interest rate over the life of the loan, you must spread the deduction over the loan's term. Real-estate taxes are deductible for the year you pay them.
Certain nondeductible fees you pay to refinance your loan are capital expenses, which means that you can count them as part of your basis in the property and depreciate them on your tax returns over time. Capital expenses incurred during a refinance include owner's title insurance, transfer taxes, surveys, recording fees, legal fees, utility installation expenses, sales commissions and abstract fees.
Claiming Deductions and Depreciation
If the property you refinance is an investment property that doesn't generate rental income, claim your deductible expenses and depreciation on Schedule C as a business loss. If the property is a rental, claim your deductible expenses and depreciation on Schedule E as a rental real-estate loss. You must also file Form 4562, Depreciation and Amortization. If you have more than one business with property requiring depreciation, file a separate copy of Form 4562 for each. You must also file separate copies of Form 4562 if you are claiming depreciation for both rental and non-rental investment properties.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.