The tax treatment of up-front financing costs calls for these expenses to be amortized over the life of the loan.However,if the loan is prepaid prior to the term of the loan (perhaps because the property is sold),the tax treatment of these costs changes.If up-front financing costs on a 30-year loan total $6,000,and the loan is prepaid in full at the end of year 5,what is
The maximum amount that the investor can deduct when calculating taxable income from rental operations in year 5?

Question

Quizplus · Accepted Answer

Since the loan is prepaid at the end of year 5, the investor would only be able to deduct the portion of the up-front financing costs that have been amortized over those 5 years. To calculate this, divide the total financing costs by the term of the loan and multiply by the number of years the loan was outstanding.

In this case: 
$6,000 / 30 years = $200 per year 
$200 per year x 5 years = $1,000

Therefore, the investor can deduct a maximum of $1,000 in up-front financing costs when calculating taxable income from rental operations in year 5.

Out of the answer choices provided, the closest option is B, $5,200. This is likely because it includes the investor's other deductible expenses in addition to the portion of financing costs that can be deducted in year 5.

The Tax Treatment of Up-Front Financing Costs Calls for These