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?

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?

The Maximum Allowable Deduction in year 5 = $6,000 - $800 = $5,200

Explanation:

Up-front financing costs per annum = Loan amount/ number of years

                                                           = $6,000 / 30 = $200

Total financing costs deducted till the fourth year  = $200 x 4 = $800

Maximum Allowable Deduction in year 5 = $6,000 - $800 = $5,200

Therefore, the Maximum Allowable Deduction in year 5 = $6,000 - $800 = $5,200

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