Definition of "capitalized expense"



[email protected] (Patrick Wallace) said:
I'm struggling with how to account for various closing costs paid on a
mortgage taken on my personal residence. In a separate (earlier)
transaction, I purchased an apartment building for cash, then took out
a mortgage on my own home to replace the funds used in that purchase.
Looking at the tax guide for small biz I am given to understand that I
cannot deduct the points paid on the loan all at once. It's a
"capitalized expense."
Ok, but where do I post that? Do I create an asset account called
"Loan origination fees" or something? The term capitalized expense is
an oxymoron (to me, since I'm a writer, not an accountant).

Think of it as a deferred expense, because you can't write it off all
at once.

Generally, most of the closing costs for a personal residence re-fi
will not be deductible, since they involve a personal asset. One
major exception are points. If paid, they may be amortized over the
life of the loan. In other words, if the new loan has 300 payments,
you can write off 1/300 for each month the loan is outstanding during
the year. The write off would go on Schedule A under "Points not
reported to you on form 1098". If you pay the loan off early, you
deduct the balance of the points not written off then.

As to classification on a balance sheet, your assumption is correct.
We routinely set up "Loan Costs", or "Loan Origination Fees" as an
asset account while we write the costs off over time (along with an
Accumulated Amortization account to, well, accumulate the
of the costs).

Steve Bentley, CPA, MBT
Better Business Systems


What about amortization of closing costs for a line of credit? The
line of credit has resulted in two loans to date. Can we capitalize
the closing costs for the line of credit (as it could have resulted in
NO loans)? Over what period of time should we amortize? I know it
should be over the period of future benefit. Each loan has a term of
48 months (4 years). The line of credit is available for two years.
Should the costs be amortized over the two year period from date of
establishment of the credit line?



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