What refinancing costs are treated as
When you refinance a rental property, the closing costs you pay — origination fees, appraisal, title search, recording fees, lender fees, and similar charges — are not immediately deductible as operating expenses. They are treated as prepaid financing costs, capitalized and amortized over the term of the new loan.
The logic: these costs benefit you for the entire remaining loan period, not just the current year. The tax code requires you to spread the deduction over that period rather than front-loading it in year one.
Technically, refinancing costs are deducted as part of your loan origination costs on Schedule E, amortized as an interest-like expense. If your loan term is 30 years and you paid $6,000 in closing costs, you deduct $200 per year.
Points: the exception with its own rules
Mortgage points (discount points paid to reduce the interest rate) have specific rules. On a refinance, points are generally not deductible in the year paid — they must be amortized over the loan term, same as other closing costs.
This contrasts with original purchase financing, where points may be deductible in the year paid under certain conditions (the property is your principal residence and certain other tests are met under Rev. Proc. 87-15). On a rental property refinance, those purchase-point rules do not apply — amortization over the loan term is the standard treatment.
What happens when you pay off or refinance again
If you pay off the loan early — by selling the property or refinancing again — the remaining unamortized balance of your refinancing costs is fully deductible in the year the loan is retired. This is one of the deductions sellers often miss when computing the net gain on a rental sale.
Track your unamortized loan costs on a separate amortization schedule. When you sell or refinance: (1) determine the unamortized balance, (2) deduct it in that year, (3) close out the asset on your books. If you refinance again, start a new amortization schedule for the new loan's closing costs.
Frequently asked questions
Can I deduct all refinancing closing costs in the year I refinance?
No. Refinancing costs on a rental property are amortized over the life of the new loan. Only the portion attributable to the current year is deductible annually.
What happens to unamortized refinancing costs when I sell the property?
The remaining unamortized balance is fully deductible in the year of sale. Include it as a selling expense or business expense on your final Schedule E for the property.
Are refinancing costs included in the property's depreciable basis?
No. Loan costs are financing costs, not part of the property's basis. They are amortized separately, not added to the depreciable basis.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.