Taxpayers Must Amortize Points Paid to Refinance
QUESTION: I refinanced my single-family home investment property last April. May I deduct all the points and loan fees on my 1987 return, or must I deduct those charges over the full period of the loan? --T. K.
ANSWER: Unlike an original financing, where points and fees are fully deductible, the points for all residential refinancings are amortized over the life of the loan. This applies whether the refinancing is for a personal residence or an investment property. For example, if you paid $3,000 in points for a 15-year refinancing of your property, you would be entitled to take a $200 deduction on your income taxes each year for the life of the loan. Should you sell the property before the loan expires, the balance of the expense can be treated as a property cost and subtracted from any gain on the sale.
The same rule applies to loan fees for an investment property refinancing. However, refinancing fees for a personal residence are added to its “tax basis”--basically, the cost of the house plus improvements--thereby lowering the taxable gain when it is sold.
Q: Last year, I received a taxable lump-sum distribution of $100,000 from my employer’s profit-sharing plan. Within 60 days of getting it, I put $10,000 of it in an individual retirement account. Now I have decided I want to take advantage of the special five- or 10-year averaging program available to me from the Internal Revenue Service. However, I recently realized that I might not qualify for averaging because I rolled over a portion of the total $100,000 distribution into an IRA. The folks at the Internal Revenue Service haven’t been able to give me a consistent answer. Can you? --N. Y.
A: Yes, but you’re probably not going to like it. According to our legal experts, you are not eligible for the averaging because you put a portion of the distribution into an IRA. Under previous rules, the IRA rollover could be undone and, after paying a minor penalty, you could start from scratch. But, after realizing that the rules were being abused, the IRS has made the IRA rollovers irrevocable.
Under current rules, you must treat the remaining $90,000 as ordinary income. Our experts advise others who are given large, lump-sum profit-sharing or retirement distributions when they leave a company to thoroughly investigate the tax implications before making a move. Basically, by putting $10,000 in an IRA, you took advantage of a tax benefit available to you. But the move cost you the chance to take advantage of the income-averaging opportunity, a potentially more beneficial tactic, on the remaining $90,000.
Q: Not to beat a dead horse, but even after your latest explanation I don’t know what I’m supposed to do with my individual retirement accounts. I am 72 years old and have three accounts. Two weeks ago, you said that, under Internal Revenue Service Notice 88-38, I can take my required minimum withdrawal from one account and nothing from the others. But I thought the trustees of the other two accounts had to distribute a minimum amount, even if I didn’t want to take it from them. This seems to be a contradiction.--J. A.
A: You’ve touched on a very real problem that is likely to persist until the final rules and regulations for IRA disbursements are settled upon, published and fully operational. So, at least for the time being, you should expect some fuzziness in the administration of the IRA accounts, says Ellen Marshall, an IRA specialist in the Costa Mesa office of the law firm of Morrison & Foerster.
According to Marshall, the wisest course of action is to tell the institutions from which you do not want a distribution that you have decided to take your full minimum withdrawal from another of your IRA accounts and do not wish to withdraw anything from the account at their institution. However, Marshall warns that she cannot promise what the institutions’ responses to such advisories might be. Some institutions, she says, might persist in making a disbursement in order to keep track of their obligations of handling the IRA accounts.
“All these regulations are still very new and are still in flux,” she says. “So you can expect some confusion. The best bet is to get in contact with the institutions and ask what their policies are.”
