Topic 05 · 5 min read
Amortization: The Other Slow Write-Off
Not everything spread over years is depreciation.
Depreciation applies to physical things. Amortization is the parallel rule for costs that are not physical: loan fees, points on a rental mortgage, certain lease and organization costs. They are deducted a little each year across the life of whatever they relate to — usually the loan term.
What to know
- Loan costs follow the loan
- Origination fees, appraisal charges tied to the loan, and points on a rental are spread over the years of the mortgage, not deducted at closing.
- Payoff accelerates the rest
- Refinance or sell, and the unamortized balance of the old loan's costs generally becomes deductible at that point.
- Startup and organization costs
- Forming an entity to hold property creates costs with their own limited immediate deduction and a long write-off for the remainder.
- Keep the schedules separate
- Loan amortization of a balance and tax amortization of a cost share a name and nothing else. Muddling them corrupts both records.
The tax benefit
Costs that produced no immediate deduction still turn into deductions eventually, and a refinance often releases the remainder all at once.
Worked example
Points across a loan
$4,500 of points on a 30-year rental mortgage gives $150 a year. Refinancing in year seven frees the remaining balance of about $3,450 as a deduction that year.
Watch out for
- Points on a rental are not treated like points on your own home.
- Fees paid to acquire the property belong in basis, not in loan amortization.
- Refinancing with the same lender can complicate the write-off of the old costs.
Terms from this topic
AmortizationPointsLoan costsOrganization costs
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