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Kathy001
Level 1

I recently completed a cash-out re-finance on my rental property. I was trying to record this transaction on Quickbooks but wasn't sure what's the correct way to do so.

 

The total loan amount is $66k, and the bank included loan costs of $5k and closing cost of $1k into the loan. Therefore, the total cash I received was $60k ($66k-5k-1k). To my understanding, loan costs such as points and appraisal fees are amortized over term of the loan, and closing cost such as title insurance will be added to the basis of the property and will be depreciated overtime (27.5 years for rental property). 

 

To set up the initial transaction, I set up contra liability accounts for the loan cost and closing cost:

DR. CASH (+) $60K

DR. LOAN COST (CONTRA LIABILITY) $5K 

DR. CLOSING COST (CONTRA LIABILITY) $1K

CR. MORTGAGE PAYABLE (+) $66K

 

For simplicity sake, let's say the loan term is 10 years, and the interest rate is 5%. In Year 1, I would record the following JE:

 

DR. MORTGAGE PAYABLE (-) $6.6K

DR. INTEREST EXPENSE (+) $3.3K ($66K*5%)

CR. CASH (-) $9.3K

CR. LOAN COST $500 ($5K/10 YRS)

CR. CLOSING COST $100 ($1K/10 YRS)

 

To record the loan amortization, I would record the following JE to amortize $5,000 over the loan term (10 year).

DR. DEPRE. - LOAN COST (+) $500

CR. ACCUM. DEPRE. - LOAN COST (+) $500

 

To record the closing cost (added basis to the property), I would record the following JE to depreciate the $1,000 closing costs over 27.5 years:

DR. PROPERTY (+) $36 ($1000/27.5)

CR. ACCUM. DEPRE. - CLOSING COST (+) $36

 

Apologize for the long post. Any comments would be greatly appreciated!

Solved
Best answer January 21, 2021

Best Answers
john-pero
Community Champion

You said re-fi but did not indicate any payoff of existing loan. But aside form the new loan having to include payoff lets walk through this for your "simplified" illustration

 

Step 1

Cr: New Loan (long term liability) $66k

Dr: Cash (asset-banking) $60k

Dr: Loan amortization (other asset) $6k

 

Reasoning? everything spent related to refi is related to loan, not to enhancement of property. And the loan costs, to show up properly on the balance sheet must be in the asset section, not a "contra" liability which would produce a negative liability.

 

Step 2, the only step 2 transactions are monthly or annual ACTUAL payments to lender consisting of principal and interest.

 The effect of a check is Cr banking, Dr loan liability and Dr interest expense and that is all. You already recorded the increased amortizable asset in step 1. 

 

Step 3

You do , on an annual basis, record the (in your case) amortization costs over 11 years, same as you would a 10 year depreciable asset - Year 1 and year 11 are each 1/2 of an annual amount and years 2-10 are full amount. So: Dr: Accumulated amortization $300 and Cr: Loan Amortization (asset, remember) $300. In year 2 - 10 it will be 600/600.

 

Step 4

No step 4, in my opinion, as your additional closing costs were related only to refinance of an existing property.  If you had purchased the property with this loan, then a portion would have gone to purchase, which is divided into land (never depreciable) and building (27.5 years) all asset rel;ated closing costs are added to asset BEFORE allocation between building and land. Therefore, if you did have to depreciate the new-related-only-to-new-loan title insurance then you would have to split it between building (27.5 yr) and land (0 year) - totally impractical.  Opinions on this may vary, but ask yourself, who required the title insurance? The lender. Thus loan related.

 

A quick tutorial in property allocation. Say you purchased this property for $60k with loan costs of $5 k and closing costs of $1k, then you would 

DR property asset $61k

DR amortizable fees (asset) $5k

CR new loan $66k

 

Then you would, and an example based on assessed tax value of land 20k, building 80k, total 100k

CR property asset $61k

DR Land $12.2k

DR Building $48.8k, which is what you depreciate over 27.5 years, starting year 1 based on first month of serviceability, meaning you cannot start depreciation until property is ready to rent. Thus if in the middle of a rehab, you cannot start depreciation until rehab is complete and you start advertising  How Rental Property Depreciation Works (investopedia.com)

I know this is more than you asked for but it is helpful to know all this

 

 

View solution in original post

4 Comments
john-pero
Community Champion

You said re-fi but did not indicate any payoff of existing loan. But aside form the new loan having to include payoff lets walk through this for your "simplified" illustration

 

Step 1

Cr: New Loan (long term liability) $66k

Dr: Cash (asset-banking) $60k

Dr: Loan amortization (other asset) $6k

 

Reasoning? everything spent related to refi is related to loan, not to enhancement of property. And the loan costs, to show up properly on the balance sheet must be in the asset section, not a "contra" liability which would produce a negative liability.

 

Step 2, the only step 2 transactions are monthly or annual ACTUAL payments to lender consisting of principal and interest.

 The effect of a check is Cr banking, Dr loan liability and Dr interest expense and that is all. You already recorded the increased amortizable asset in step 1. 

 

Step 3

You do , on an annual basis, record the (in your case) amortization costs over 11 years, same as you would a 10 year depreciable asset - Year 1 and year 11 are each 1/2 of an annual amount and years 2-10 are full amount. So: Dr: Accumulated amortization $300 and Cr: Loan Amortization (asset, remember) $300. In year 2 - 10 it will be 600/600.

 

Step 4

No step 4, in my opinion, as your additional closing costs were related only to refinance of an existing property.  If you had purchased the property with this loan, then a portion would have gone to purchase, which is divided into land (never depreciable) and building (27.5 years) all asset rel;ated closing costs are added to asset BEFORE allocation between building and land. Therefore, if you did have to depreciate the new-related-only-to-new-loan title insurance then you would have to split it between building (27.5 yr) and land (0 year) - totally impractical.  Opinions on this may vary, but ask yourself, who required the title insurance? The lender. Thus loan related.

 

A quick tutorial in property allocation. Say you purchased this property for $60k with loan costs of $5 k and closing costs of $1k, then you would 

DR property asset $61k

DR amortizable fees (asset) $5k

CR new loan $66k

 

Then you would, and an example based on assessed tax value of land 20k, building 80k, total 100k

CR property asset $61k

DR Land $12.2k

DR Building $48.8k, which is what you depreciate over 27.5 years, starting year 1 based on first month of serviceability, meaning you cannot start depreciation until property is ready to rent. Thus if in the middle of a rehab, you cannot start depreciation until rehab is complete and you start advertising  How Rental Property Depreciation Works (investopedia.com)

I know this is more than you asked for but it is helpful to know all this

 

 

View solution in original post

Kathy H
Level 2

Thank you so much, this is beyond helpful! @john-pero 

 

The property was purchased in cash originally, therefore I did not have the JE to payoff the existing loan.

 

Thanks for bringing up the fact that we need to start depreciation when the property is ready for rent. I originally thought that I could start depreciating the property on the date of purchase. It makes sense after reading the link you provided and a few examples from the IRS publication 527. I have a follow-up question on this topic. Let's say I purchased this property in March this year, performed renovation to the kitchen and installed appliances in April, and finally marketed the property for rent in June. Would I start depreciating the appliances in April (when the appliances are ready and available for their intended use), and start depreciating the property (over 27.5 years) in June when it is ready for rent?

john-pero
Community Champion

Appliances are 5 year items and regardless of when you purchase and put in service are half year for first year. Guide to Rental Property Appliance Depreciation | FortuneBuilders

So basically you get 10% depreciation this year, 20% /year for next 4, and 10% in final year 6.

 

Aspire to be a large enough landlord and appliance replacement can annually qualify as safe harbor de minimis where you deduct appliances as if they were ordinary repairs. 

Kathy H
Level 2

Thanks for your response! @john-pero Appliances might be a bad example. How about if those are kitchen renovations (e.g., not deductible repairs and maintenance expenses) that should be added to the basis of the building? Can I start depreciation once the kitchen renovation has been completed (over 27.5 years) in April, or do I add the kitchen renovation costs to the basis of the building and wait until the entire property is ready for rent in June to begin depreciation? Thanks!

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