Refinance Rental with cash pay out

[Gretel]

I am dealing with a rather complicated refinance and need some "what would you do" on a specific question.

Total refinance amount is 3,000,000
Loan paid off is 1,000,000 - which is roughly a third

Then there are taxes, escrows, fees unrelated to loan amount, and fees dependent on loan amount. I am trying to maximize the prorated loan amount to preserve as much interest deduction as I possibly can. Kind of recreating the closing statement with zero pay-out and then see what the loan amount would be. My thinking is that the fees that would have been charged anyway can be fully allocated to the rental and do not need to be prorated.

Does anyone think I NEED to prorate everything?

[mactoolsix]

YES - All non-recurring fees - Escrow fees, title / ALTA insurance, notaries etc., - should be prorated over the life of the loan.

Recurring costs- Taxes, interest, insurance etc - can be expensed in the year paid.

The amount that equals the acquisition principle pay off is eligible for interest deduction.

What was the other $2 Mil used for? If for a Sch. C or other deductible expense, allocate the non-recurring costs and the interest each year.

Since this is not related to a principle residence, no election is needed, however you must trace the use of funds §1.163-10T and follow the ordering rules in §1.163-8T as the loan is paid.

Mike