Points Paid on Refinance

[Bird Legs]

client refinanced his residence in 2004. Paid Points of $900. on a 30 yr. mortgage.
On July 1, 2005, client converted his residence to rental property and moved out.
How does this affect the points paid in 2005?
Does client report for 2005 on Sched. A amortized points of $15.
and on Sched. E points $15.?
What code section is this amortized under on Form 4562?
Thanks

[jainen]

How much

How much was the new loan for, and what did he spend the money on?

[Bird Legs]

Refinanced Mortgage

The refinance was to obtain lower interest rate on the residence.
this was a 30 yr. mortgage and the refinancing was in 2004.
In 2005, June, that client moved out of residence and converted it to rental.

[Bees Knees]

Jainen makes a good point. To amortize points as interest expense for business purposes (Schedule E), you have to follow the interest tracing rules. If the loan proceeds cannot be traced to the building (for example, extra cash from the refinance was used to purchase a personal vehicle), then you can't take a deduction for the amortization on Schedule E. And since it is no longer a first or second home of the taxpayer (because it was converted to business use), then it can't be deducted on Schedule A.

If the loan proceeds were used to improve the property, or refinance a mortgage to purchase the property, then they would be deductible on Schedule E.

Amortization on Form 4562 is not the same as amortization of points on a loan. Amortization of points is nothing more than a procedure for deducting interest paid over the life of the loan. Amortization of other costs on Form 4562 deals with special rules for deducting certain costs that otherwise would be capital costs, if not for a specific code section that allows such capital costs to be amortized over a specified period of time. Even though they are both called amortization, they mean two separate things.

[jainen]

on a sticky note

Amortization is $2.50 per month, so yes, $15 to personal and $15 to rental. I never understood about the code section, but a long time ago I wrote "Section 461" on a sticky note that I move to my new reference book every year.

[Unregistered]

If the loan proceeds were used to improve the property, or refinance a mortgage to purchase the property, then they would be deductible on Schedule E.

.

And remember the interest follows the same path.