Unamortized loan expenses

Unamortized mortgaging finance expenses, are usually the least looked at deduction in a exchange.

There are two fees you are charged when you acquire a loan.

The first is the cost of getting the loan. The other is the interest you pay.

The fees you are charged when your mortgage is funded are substantial.

The legal fees include, points, the appraisal, escrow, surveys, real estate commissions, service charges, and title costs.

Expenses that do not qualify as interest, are treated as service costs.

All of these costs are deductible by amortizing them over the life of the loan taken out to purchase the property.

When you take out a mortgage to purchase the property all of the origination fees are considered interest.

All expenses that qualify as interest are treated as prepaid interest, capitalized and amortized straight-line over the life of the loan.

In case there is a balance in the unamortized loan costs account, and the loan is paid off or assumed, and the real estate being exchanged was used in a trade or business ( rental income property ), the entire balance is deductible as an operating expense of the property in the year the property is exchanged.

Example:

You are exchanging a rental property you have held for 12 years and your loan costs were 36,000 dollars on a 20 year mortgage.

For the past 12 years you deducted your loan costs by amortizing them at the rate of $1,800 per year ( $36,000/20 ).

Your deduction totaled $18,000 for the 12 years ($1,800 per year times 8 years).

The unamortized balance of $14,400 is deductible at the time of the exchange, as an operating expense of the property.

This is an ordinary deduction against ordinary income in the year you exchange the property.

In a 1031 exchange the property exchanged is treated as property sold for purposes of deducting loan costs, which makes this is a extremely important deduction.

Unamortized Loan Expenses

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