Can a sole proprietor renting from her own LLC claim both amortization of loan fees and a special depreciation allowance on those fees in 2024?
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To answer whether a sole proprietor renting from her own LLC can claim both amortization of loan fees and a special depreciation allowance on those fees in 2024, we must analyze the treatment of loan fees (such as loan origination fees, points, and similar costs) for rental real estate under the Internal Revenue Code and IRS guidance.
1. Nature of Loan Fees for Rental Real Estate
Loan fees—such as loan origination fees, points, and other costs paid to obtain a mortgage—are not immediately deductible as interest (except for certain points on a principal residence, which is not the case here). For rental property, these costs are considered capital expenditures and must be added to the basis of the property or amortized over the life of the loan, depending on the type of fee and the property involved.
- IRS Publication 527 (2024) states: "Certain expenses you pay to obtain a mortgage on your rental property can’t be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property".
- For points (loan origination fees), the rules follow the original issue discount (OID) rules. Points paid for the use of money are treated as prepaid interest and must generally be deducted over the life of the loan, not all at once.
2. Amortization of Loan Fees
- Amortization: Loan fees (including points, loan origination fees, and similar costs) paid to obtain a mortgage on rental property must be amortized over the life of the loan. This is done using the straight-line method, unless the OID is not de minimis, in which case the constant yield method is used.
- The deduction is taken each year over the term of the loan, not as a lump sum in the year paid.
3. Special Depreciation Allowance (Bonus Depreciation)
- The special depreciation allowance (bonus depreciation) under IRC §168(k) allows a taxpayer to deduct a significant portion (or all) of the cost of certain qualifying property in the year it is placed in service.
- However, loan fees are not depreciable property. They are intangible costs associated with obtaining a loan, not tangible property subject to depreciation. The special depreciation allowance applies only to tangible property with a recovery period of 20 years or less, certain computer software, water utility property, and certain qualified improvement property.
4. Can Both Be Claimed?
- No, you cannot claim both amortization and a special depreciation allowance on loan fees.
- Loan fees are not eligible for bonus depreciation because they are not depreciable property under MACRS or §168(k).
- The only allowable deduction for loan fees is amortization over the life of the loan.
5. Additional Considerations
- If the sole proprietor is renting from her own LLC, the transaction must be respected as bona fide, and the LLC must be treated as a separate entity for tax purposes (e.g., if the LLC is taxed as a partnership or corporation). If the LLC is a disregarded entity (single-member LLC), the owner and the LLC are treated as the same taxpayer for federal tax purposes, and the question of "renting from herself" is moot for federal tax purposes.
- Regardless, the treatment of loan fees does not change: they are amortized, not depreciated, and not eligible for bonus depreciation.
6. Supporting Authority
- Publication 527 (2024): "Certain expenses you pay to obtain a mortgage on your rental property can’t be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property."
- "Points paid (or treated as paid (such as seller paid points)), by a borrower to a lender increase OID. Because points are prepaid interest, you generally can’t deduct the full amount in the year paid, but must deduct the interest over the term of the loan".
- "The special depreciation allowance is figured before you figure your regular depreciation deduction. If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. The details of this election are in chapter 3 of Pub. 946 and the instructions for Form 4562, line 14"—but this applies only to qualifying property, not to loan fees.
7. Conclusion
A sole proprietor renting from her own LLC cannot claim both amortization of loan fees and a special depreciation allowance (bonus depreciation) on those fees in 2024. Loan fees must be amortized over the life of the loan; they are not eligible for bonus depreciation because they are not depreciable property under MACRS or §168(k).
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