A Rental Refinance Funds Renovations: Which Costs Enter the Asset Schedule?
Trace loan proceeds and actual project costs instead of adding the refinancing balance to depreciation basis.
About this planning example
Anonymized composite planning example informed by recurring discovery-call themes. Facts are generalized to protect privacy. This is educational analysis, not a testimonial or a report of completed client work, verified savings or investment results.
The situation
A rental owner refinances a small multifamily property and uses part of the proceeds for renovations. Other proceeds remain in cash or pay different obligations. The owner wants a cost segregation study and assumes the full new loan balance increases the building’s depreciable cost.
The decision
The project needs a source-and-use reconciliation. The lender’s balance describes financing, while invoices describe what was acquired or improved. Replacing an old loan, holding cash and constructing an improvement are different uses of proceeds, even when they appear in one settlement package.
Tax rule to verify
Capital improvements can increase adjusted basis. Borrowing itself does not create an additional building asset. Loan costs, repairs and capital improvements require their own classification rather than one combined renovation total.
Our recommendation
Reconcile the refinance closing statement to bank activity and vendor payments. Group project costs by work performed, completion date and property component. Have the preparer distinguish repairs from capital additions and review how interest follows the use of proceeds. Give the study team supported asset costs rather than the amount borrowed.
Records needed before implementation
- Original and refinance settlement statements
- Loan-proceeds ledger, bank statements and contractor invoices
- Prior depreciation schedule and project completion records
What could change the recommendation
If invoices are missing, reconstruct them before estimating a deduction. If a portion of the property remains personal, allocate costs appropriately. If proceeds funded a separate business or personal purchase, keep that use visible instead of attributing it to rental improvements.
The planning deliverable
A project ledger tying financing to expenditures and expenditures to the tax asset schedule. This case does not assume that all renovation spending is immediately deductible or that the new mortgage balance is depreciable.
Source and further reading
IRS Publication 551: Basis of Assets
Reviewed October 19, 2026. Apply the rules for the relevant tax year with your preparer; state treatment may differ.
Related Reading
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